Facebook, WhatsApp & Game Theory
New Delhi, Feb. 26 -- Last week, social networking giant Facebook announced its decision to buy WhatsApp, a peer-to-peer messaging service linked through mobile numbers, for $19 billion (about ' 1,18,000 crore). HT takes a closer look at the finer nuances of how the bold move was probably guided by a carefully crafted strategy based on principles of game theory:
What does Facebook's acquisition of WhatsApp mean for the buyer?
Facebook's decision to buy WhatsApp for such a high price was probably based on its plans to make the next big venture into the mobile Internet arena, billed as the next big thing in the realm of social networking. WhatsApp, and some of its peers, could eventually make SMS dated. For Facebook, it was critical to embrace the emerging group messaging culture that is fast changing the grammar of social media communication. The deal brings on WhatsApp's 450 million subscribers, of which 10% are in India, to its fold, enabling its immediate expansion as an on-the-move network from mostly desktops and smartphones.
Why did Facebook agree to pay such an expensive price for this purchase?
Facebook's strategy was simple: price out rivals. There are now reports that Internet giant Google was also in active discussions to buy out WhatsApp. Initial reports had claimed that Google had bid $10 billion for the company, just about half of the amount Facebook offered. Later reports suggest that Google upped its offer for WhatsApp after it learned how much Facebook would eventually pay the messaging service. It is an example of a game theoretic exercise, where firms try to outthink each other.
What is game theory?
Game theory is a branch of mathematical economics first theorised by Jon Von Neumann in the 1930s. It involves the principles of probability in a multi-player world where each player (agent, firm) attaches a certain probability to the other players' behaviour to an action he himself undertakes.
How does it work?
Game theory is best explained in the context of auctions. An auction is a non-cooperative game involving several players. Each player assumes that the other players would react in a certain way for every action of his. …