Facebook’s WhatsApp acquisition a bold move for the global instant messaging gold medal

The news of Facebook acquiring WhatsApp for an enormous pile of money is front and center in the mobile communication industry today, and for good reason. Having watched WhatsApp grow from nothing into a cross platform winner over the last five years and doing a darn good job of executing on a growth plan, I'm impressed with what they've done. And while I was shocked to see the deal's valuation, I've taken some time to think about it rationally, and it might not be that insane.

Disclosure: I'm a Facebook shareholder.

Before I dive into the deal and the strategic thinking that lies behind it, let's settle the issue of what price is actually being paid. Some figures say $16 billion, and some say $19 billion.

It breaks down like this: WhatsApp shares are being converted into $4 billion of cash and $12 billion in Facebook stock. So Facebook is actually paying $16 billion for WhatsApp the business. But they're issuing another $3 billion in restricted stock to founders and employees of WhatsApp, and this is obviously comparable to stock based compensation that employees typically get, so it's not really part of the acquisition price.

Most people have come to the conclusion that $16 billion is totally insane. Why would Facebook pay such a price for a business with practically no cash flow today?

Most people, whether they be investors or industry observers and hobbyists, have come to the conclusion that $16 billion is totally insane. Why would Facebook pay such a price for a business — some 16 times more than the $1 billion it paid for Instagram, by the way — with practically no cash flow today?

That thinking is extremely short sighted. How quickly some folks forget that Facebook, too, was a near-zero revenue company not so long ago. WhatsApp had zero revenue until it launched a subscription model where some customers pay $1 a year to access the global messaging service that it provides.

In Facebook's short (30-minute) conference call addressing analyst questions, Mark Zuckerberg and his team made it crystal clear that monetizing WhatsApp is not a top priority right now. They're encouraged by the early success of the subscription model, but their priority is to massively grow this sucker. They want to connect billions of people and displace the legacy standard of SMS.

Facebook’s WhatsApp acquisition a bold move for the global instant messaging gold medal

Let's just focus on the big picture. The SMS industry, globally, has a much larger user base than WhatsApp, but doesn't deal with that much more message volume. WhatsApp has 450 million monthly active users and they handles about 19 billion sent messages and 34 billion received messages per day. WhatsApp is also growing at about 1 million users per day, which is staggering, and implies that within a couple of years it will surely be handling more messages than the entire SMS industry.

"WhatsApp is on the a path to connect 1 billion people. The service that reach that milestone are all incredibly valuable."Mark Zuckerberg, Facebook CEO

Oh, and according to Facebook the SMS business brings in $100 billion per year globally. So let's talk about strategy and monetization. Let's assume Zuckerberg doesn't care about the revenue from WhatsApp for at least the next two years. They care about getting to a billion subscribers. As he said in the press release announcing the acquisition, "WhatsApp is on the a path to connect 1 billion people. The service that reach that milestone are all incredibly valuable."

In the next five to 10 years, SMS will essentially die. Everyone will be using a smartphone and a data plan of some kind. SMS is stagnant and doesn't improve — it architecturally can't improve — while IM clients add new features all the time. Unless there is an open global standard, there can only be one major winner, and under Facebook's control the chances are very good that the winner will be WhatsApp.

To be clear, if WhatsApp remained independent this wouldn't be so clear. Maybe somebody else could crush them, though their lead is substantial and their business model flexible. But now that Facebook is in the game it seems obvious that eventually the two services will be tied together on the back-end, so your Facebook friends will automatically show up in your WhatsApp contact list, regardless of whether you have their phone number. Facebook is a huge social network but people at-large aren't in the habit of using Facebook Messenger as a real-time communication tool.

Unless some other major player does something very signifiant and very soon, I think Facebook has created an insurmountable lead in the race for the global IM gold medal. And there isn't really a silver or bronze up from grabs. There's the winner of the mass market, and everything else serves niches.

People often forget is that what something is worth on its own is very different than what it's worth in the hands of the right buyer

Is WhatsApp and that gold medal worth $16 billion? That's less clear. One thing people often forget is that what something is worth on its own is very different than what it's worth in the hands of the right buyer. I don't think there is any chance that WhatsApp could go public at such an extreme valuation. But can Facebook afford to look forward 5 or 10 years and pay up front for that value? Yes they can.

Facebook has also very clearly said that advertising probably isn't the best way to monetize an instant messaging client. They like the subscription model. But don't be fooled into thinking Facebook won't use your data to help target ads at you while you use other Facebook services. That one seems like a no-brainer. It's sort of like how Google can pay attention to keywords in your emails in order to serve useful ads at you, except Facebook can do this via instant messaging.

In a very simplistic scenario, could WhatsApp grab $1 per year from a billion people and operate with $100 million of marginal cost to Facebook? That alone would justify the $16 price tag and then some. And what if Facebook can earn an additional $1 per Facebook user (there are well over a billion of them) per year by better targeting ads through analytics gathered through WhatsApp? Oh, there's another few billion. Per year.

It's easy to call the price tag crazy. It's easy to call this a new tech bubble. But if you get your thinking cap on and actually look beyond today's lack of cash flow, it's just as easy to say the deal is a bargain.

Who's right? I don't know. But it's definitely not cut-and-dry either. It's utterly fascinating.


Reader comments

Facebook’s $16 billion WhatsApp acquisition a bold move for the global instant messaging market


Damn first Instagram now WhatsApp; I love both these apps. However, knowing Facebook is now watching over these two, gives me a uneasy feeling.

What's app doesn't do adverts at the moment but now I can see it being the new Facebook messenger with Facebook profiles etc - its just a way for them to buy users... Android central should do a poll and see how many what's app users have Facebook and how many use what's app messenger as an alternative to facebooksn own messenger

Posted via Stock Nexus 4*

In other words, they want to rope in another 500 million+ users and then flick the money switch. It doesn't matter WHEN they do it, but the fact that they will do it is what's disgusting.

Guess what will happen? the app will start hogging your data connection for all that abusive back end privacy invasion rubbish/syncing and whatnot, and in the end you'll be paying more than you would have for an SMS in data fees/usage. 'progress'...

Zuckerberg the lunatic wants to connect the world, what he doesn't understand is that the world doesn't want to be connected. Not everyone wants a cable plugged up their hole.

Glad I never used whatsapp, saved having to abandon it, which I hope others do. There is room for a competitor now that there are people lined up ready to leave when a decent rival app comes along. And no, Google, you do not have permission to buy that one when it comes.

Ignorance. If people don't want to be plugged in they can cut the cord. It's That simple. It's absolutely ignorant when people mention invasions and what not like guns are at peoples' heads and the antagonist is forcing them to download their life away.

AC App via Nexus 5

Watch as WhatsApp will now get advertisements everywhere. There's no way FB will recoup the massive costs without ads.

i will be the first to deactivate my whatsapp really irretating how facebook is after our privacy in all ways

Posted via Android Central App

You got rid of everything Google on your phone as well? Location services? NFC? They have about the same in terms of privacy. Simply you have none.

FB only pay this amount to be after something and that's our privacy, I dont care about other privacy issues as much as I care about how FB spy on PPL. That's how I take it.

Posted via Android Central App

Yes, while I do not use FB etc, I usually do not second guess people who are multi billionaires before age 30.

Sent from my Moto X!

I think that FB is crazy on the price they're paying for this company. The only thing that makes any sense is that they're doing this to deny the competition for it (which is exactly why FB grabbed Instagram)

And that bothers me. FB should be trying to compete by making cool stuff, not by using its IPO war chest to reduce out competition.

Cool stuff is hard to come by, and expensive. Nothing wrong with buying the cool stuff.

If any one of us here started something that was a "huge" hit, one of the best things you can hope for is to get bought or sell your idea.

Unless you make Flappy Bird, then you just want to GTFO

and yet hangouts is still struggling to even work. whats ur f'n problem google? FIX HANGOUTS already. stock sms app is just as crappy and doesnt handle group mms as well as hangouts.

That is mostly iPhones damn problem. If you throw a proprietary layer in there (iMessage) your gonna have issues.

iMessage - iOS only. You realise you're on ANDROID Central, right?
Google Hangouts - no-one signed up to it

People use WhatsApp because there's no setup process and it uses your existing contacts. Its simple, it got a bit of a lead and then everyone went to it because they didn't want to have to deal with some friends on WhatsApp, some on Viber, some on Line, some on Kik etc. The one that gets the initial lead with identical applications can win out of the sake of convenience.

*Nobody* of my friends, including myself, use anything other than SMS and Facebook Messenger for IM. We don't even rely on FB Messenger for instant response because we know not everybody is connected to the internet all the time.

The reason for this is that SMS is really cheap for us in Belgium (and the rest of Europe I suppose). For 10€ a month we can get unlimited SMS + some call time. For 15€ we get the same + 2GB of internet/month. And everybody has GSM connection everywhere, which can't be said about the internet connection. I don't see this changing in the next few years.

If I didn't have hangouts I'd use BBM over whatsapp. Especially now that it's under Facebook's control.

Posted via Android Central App

Bbm all the way for me. Anyone who's used bbm before knows WhatsApp, I message and hangouts does not come close. If you deny that then you have never used bbm or you're just a blackberry Hater.

Posted with my note 3

Posted via Android Central App

Stop living in the past. BBM was only cool when everyone used a BB, right now it sucks donkey balls.

This message was brought to you by the numbers 0 and 1

Tried WA once, but found only one of my friends uses it so i uninstalled.
I don't use, and never will, FB, or Instagram.
Most Google apps are disabled.

Posted with my HTC One GPe via Android Central App

well I already have lifetime service however if Facebook introduce ads I will uninstall and use BBM

Posted via ACA on my LG G2

Zero f's given. I'll just use hangouts. I barely like using facebook as it is, but it is useful to keep up with family. If WhatsApp was somehow integrated into the facebook app, I could be persuaded to use it. But otherwise, no thanks.

No offence... but who wrote this article? Seems like a child handed this in for a school assignment... Please double check your stuff...

Posted via Android Central App

"better targeting ads through analytics gathered through WhatsApp"

This, this is what bothers me with this. Google does it with my email, yes, but then nothing that private goes via my email. Texting and WhatsApp were different, but now I'm not going to bother much with WhatsApp if they'll just start advertising to me based on what I said to someone privately. Even if I don't see the adverts, I don't really want Facebook selling my private interests like that.

or just flinging boatloads of cheap cash at products in the hope something will stick because things aren't going as well as you hoped.

I don't get why people are so concerned about their online privacy. I mean, who are you? Are you really that important that facebook/google/any other company will want to specifically look at your data? Online privacy is overrated, why should big companies care about you? Yes, they have access to your information, but, IMHO I don't think they care about random working class people like you or me.

What is this WhatsApp? The only thing I know about it are the spam messages I get at work saying I have a WhatsApp message at some random URL ending in an Europe, Asia, or Africa country code suffix.

Whatsapp is now going to SUCK with Facebook being the new owners! S**iiiiiiii*!! I don't own Facebook to keep my life private and now freaking whatsapp will prolly be profiles and all that S***!!! Dang! Is there any way to keep a private and low life style, being able to be in touch with family and friends though private chats and not have to have a public profile and CRAP ON THE FREAKING WEB!?

Posted via Android Central App