Business Ethics Case of the Week: The Facebook-WhatsApp Deal

Last semester, my students gave me feedback that they wanted to discuss more up-to-date business ethics cases. This inspired me to introduce a new feature to my class in “Business Ethics and Negotiations”: the Business Ethics Case of the Week (BECOW). 

The task of the students was to find, research, and present an interesting business ethics case each week. They had to prepare a short presentation where they describe the situation, analyze the case from an ethical perspective (What would Kant say?), identify the ethical problem or controversy (e.g. injustice, discrimination, corruption), and express their own opinion and come up with possible solutions for the case.

In order to give my students an idea about what I wanted from them, I modeled this assignment with my personal BECOW at the beginning of the semester:

The Facebook-WhatsApp Deal
The situation
The first thing that electrified everybody was the price of this take-over: $19 billion  is a mind-boggling amount for a smart phone application that offers free text messaging. It is 19 times the price Facebook had paid for Instagram. And already back then we thought that was outrageous.

Well, we have gotten kind of used to crazy prices when it comes to the internet and app business.

So why was Facebook’s CEO Marc Zuckerberg so keen to get WhatsApp? Well, of course, WhatsApp is a giant success: They have 450 million monthly users and one million new users sign up every day! Every day! They are successful in countries where Facebook is not so popular, e.g. some countries in Europe, South America, and Africa.

The “stickiness” of WhatsApp is also exceptional. 70% of users come back on WhatsApp every day. This is a record. Only 61% of users come back on Facebook every day. And this used to be the stickiness record before WhatsApp came around.

Many young people are migrating away from Facebook to WhatsApp as their preferred social network. At the same time, Facebook Messenger is lacking behind in market share. So we see it seems to be all about market share and staying with the majority of young users.

The moral controversy
The moral controversy of the WhatsApp deal consists of two major points: the use of private data for advertising and freeriding the infrastructure of the traditional telecommunications industry.

  1. Privacy and Advertising

WhatsApp does not use user data and advertising banners, but charges $1 for the app. Facebook’s business model, on the other hand, is based on advertising. They are selling ads that are targeted to Facebook users by data-mining their likes, demographic information, life events etc. So, for example, if you post on Facebook that you are getting married this year, you will probably see ads for wedding planners, dresses, honey moon trips and the like at the side bar of your Facebook profile.

The official announcement was that Whatsapp founder Jan Koum enters the Facebook Board of Directors, WhatsApp stays independent, and nothing will change for users.

Here it is important to know that Koum sees privacy as an important value and would not make compromises, e.g. in China.

On his blog on the WhatsApp website he even speaks out very passionately against the use of advertising in social media:

“These days companies know literally everything about you, your friends, your interests, and they use it all to sell ads.

When we sat down to start our own thing together three years ago we wanted to make something that wasn’t just another ad clearinghouse. We wanted to spend our time building a service people wanted to use because it worked and saved them money and made their lives better in a small way. We knew that we could charge people directly if we could do all those things. We knew we could do what most people aim to do every day: avoid ads

No one wakes up excited to see more advertising, no one goes to sleep thinking about the ads they’ll see tomorrow. We know people go to sleep excited about who they chatted with that day (and disappointed about who they didn’t). We want WhatsApp to be the product that keeps you awake… and that you reach for in the morning. No one jumps up from a nap and runs to see an advertisement.

Advertising isn’t just the disruption of aesthetics, the insults to your intelligence and the interruption of your train of thought. At every company that sells ads, a significant portion of their engineering team spends their day tuning data mining, writing better code to collect all your personal data, upgrading the servers that hold all the data and making sure it’s all being logged and collated and sliced and packaged and shipped out… And at the end of the day the result of it all is a slightly different advertising banner in your browser or on your mobile screen.”
Read the WhatsApp founders’ blog.

Facebook uses data and paid this incredible amount of money for WhatsApp, so the possibility to get their money back by selling ads and selling WhatsApp user data is there. Other voices suspect that what Facebook really wanted is to get into people’s address books: The average Facebook user has 250 friends but about 1200 contacts in their address book. This could be interesting information for Facebook data crunchers…(http://www.fullcontact.com/blog/whatsapp/)

  1. Freeriding the Telecom Infrastructure

The second controversy arises from the fact that WhatsApp and Facebook Messenger take away the text message business from the traditional telecommunications companies without paying for the infrastructure necessary for this service. It is the Swisscoms and Telekoms of this world that pay for the construction of radio masts and the maintenance of the telecommunications network. WhatsApp and Facebook are freeriding on this provision of the hardware indispensable for their software products. Furthermore, the traditional telecom companies need to keep improving and enhancing this infrastructure at an ever faster pace since the volume of data sent over the internet doubles every two years. In order to cope with this massive growth of data flow, the Deutsche Telecom, for example, had to invest almost four billion Euro into their network infrastructure in 2013. They earn their money with monthly fees their clients pay for their internet connection. These fees are in constant decline. The internet players like Facebook and Google, on the other hand, earn their money by using their clients’ data to sell ads. The traditional telecom in many countries are legally bound to not use their clients’ data. Sounds a lot like unfair competition, doesn’t it?

My opinion and what should be done:
WhatsApp costs 1$ and they have 1 million new users a day. Nevertheless, it will take a while until Facebook will be able to charge off the 19 billion buying price. So the suspicion that Facebook will eventually use the private data of WhatsApp users in some way and that they might put ads on WhatsApp is certainly there.

It is clear that Facebook did not buy WhatsApp to increase its revenue in the near future, but to stay in the game of international mobile messaging and because they do not want to lose youngsters. But we should be aware and watch them carefully.

And most of all, it will be necessary to develop and enforce a consistent international legal framework for the use of private data on the internet for both internet and traditional telecommunication firms. This is a very complex topic and deserves a blog post of its own.

Of course, we all love WhatsApp and so far only one of my friends has left WhatsApp because of the merger.

What do YOU think? Will you leave WhatsApp? Would you leave if they add banners and use your data?

This is the first of our series of Business Ethics Cases of the Week (BEOCW). Upcoming cases will deal with the following hot topics:

  • Flappy birds and internet gaming addiction
  • KPMG manager gets busted as inside trader
  • Protecting workers’ hearing does not sell
  • Voss Water: Truth in marketing and making glamorous water sustainable
  • The HP corruption scandal
  • Forest Fires and Palm Oil in Indonesia

Dr. Bettina Palazzo, Professor at BSL

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