Facebook’s WhatsApp acquisition a bold move for the global instant messaging gold medal
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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 5 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 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 recently when 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 last night, 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 5-10 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 or not 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.

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Reader comments

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

145 Comments

A lot of people have reacted so poorly saying "oh I'll uninstall WhatsApp now"
I really don't understand what is the idea behind such remarks

As long as it wasn't Google who bought them (and they tried), I'm actually not that upset. Still, $16 billion is insane.

Agreed. Google is anathema. I don't have a problem with Facebook, and actually, I like them because they're what's keeping the intrusive Google+ in check. Still, $16 billion seems way too much  money for Whatsapp. Really makes Microsoft's purchase of Nokia's devices division for less than half that seem much wiser. But, what do I know: Facebook's stock is trading up today, so maybe it was wise. They're purchase of Instagram seemed overpriced at the time too, but clearly that was a wise move too.

Nothing would've happened. WhatsApp is a money maker. Google would be shooting themselves in the foot if they bought WhatsApp and dropped WP support. This is nothing like Youtube because WhatsApp is not available on a computer. And the whole reason why WhatsApp is so popular is because it's available on every mobile platform. Take that away, and people will stop using it.

And yet Facebook for WP sucks.
I have this problem where no activity from friends timeline shows up on the news feed its only some pages.

which implies that Facebook doesn't care about its applications for Windows Phone. I think I will move to another alternative when they update iOS and Android before us. I won't wait months or even years to get what iOS and Android are getting. Sad thing that I know that Facebook won't update Whatsapp for us and we will remain, un-updated and forgotten.

It will still work independently under Facebook. It will be just an investment under fb as they have acquired their biggest threat and competitor. But I hope at build Belfiore makes announcements of more offcial apps as he did last year

The problem you have cited is hypothetical.... Hence no solution... Best you will get is a theory, which there are a lot already

I am not the only one with this issue.
I have checked the forums many users have this same problem so no its not hypothetical.

Window phone version ka Facebook bi ghatiya n WhatsApp bi ghatiya hi rahega.....android n ios me hi improvement honge.....whatsapp ka update tak ni milta window phn.me to.....m really upset wid window phn.management......:/

I'm Indian and can translate..

 

Translation: The Windows Phone version of Facebook is bad and so is WhatsApp and will remain so. There is improvement in only the Android and iOS versions. We didn't even get a WhatApp update for Windows phone. I am really upset with Windows Phone Management.

Thx for translating. But in my experience Whatsapp works pretty fluid in WP. Facebook however stinks, is not metro, has bad performance and load times, and has more of a Blackberry UI than a WP UI (buttons on the top and "hubs" on the side instead of buttons at the bottom and swiping though pages). Whatsapp is on part with the other platforms. But Facebook really needs to develop a native WP web and not let Microsoft do the job.

Bakalaka shaluka waka? Akalulaluka awaka mawawa ka iOS ashuka akusha Android. Akisha malopakaka raki rakika Whatsapp...

Facebook buying them is fine. If Google bought Whatsapp, WP users would land up in the same shit like the YouTube app. Thank God Google didn't acquire Whatsapp. I am wondering if Microsoft was one of the bidders too?
 

look at Facebook and Instagram BETA, Facebook clearly doesn't care about frequently updating their applications for Windows Phone, we are always behind. I got over it.

The situation has a lot to do with market share. They obviously won't prioritize WP over iOS and Android. Until WP8.1 ;)

Y cant they just update all 3 together? No one will screw them if they update their app on all 3 operating system.

They wouldn't land anywhere. Youtube is not like WhatsApp because WhatsApp is not available on a computer. The whole reason why WhatsApp is so popular is because its on every mobile platform. Take that away, and you will be losing not just customers, but money.

If you think you ever had privacy anywhere, you are highly mistaken. There is no such thing as privacy when you are using a product you didn't design.

actually Microsoft is fixing it. It was a P2P service exclusively for PC. It wasnt meant to sync between PC and phone. Microsoft needs to turn everything around and change it to a server based infrastructure so messages sync and devices dont keep ringing after you answered the call on another device. But you cant compare it to 16B FB payed. It was that high because they had to beat Google's offer.

Exactly.  And Microsoft was given a hard time for paying $8B for Skype.  It seems to me that there was a lot more to Skype that there is to Whatsapp.

It should have been. So far MS has fumbled it badly. 

 

This story about replacing the SMS standard should have been the Skype plan with Skype as the prohibitive favorite shortly after MS bought them, but MS sat on it's hands and let Skype be a terrible messaging service that wasn't reliable cross-platform. Shame on them. 

 

Game's not over yet, but the clock is really ticking now. Which backlash is worse, the anit-Facebook backash against WhatsApp or the anti-MS backlash against Skype? Will Google now buy Kik? Will AT&T buy BBM to try and retain the messaging revenue? 

Rational I saw from an analyst goes market values each FB user at 170, each Twitter user at 210, WhatsApp is cheap at 42. lmao, there may be logic in it, assuming everyone pays one dollar is wishful thinking, I don't believe any of my friends do. And WhatsApp has 50 employees. Lot of incentive to leave after a few years and take that knowledge and money with them.

Wait wait... 19 billion sent and 34 billion received messages? I'm not comprehending this... Are messages just arriving by magic? Am I missing something here?

I assume the discrepancy is due to counting a single send and multiple receptions for a group message. Sent by one guy, received by 5.

I think so also. SMS suits me fine and works on all mobile devices, not just "smartphones." The author thinks the whole world will be on smartphones in 5 years. We shall see.

The problem with SMS is that majority of carriers worldwide still charge for SMS plans. This is one of the reasons why WhatsApp is so damn popular.

I see the bigger problem being smartphone market itself. History has thought us that in the mobile space the changes happen quickly, so valuating a company like this based on something thats so far ahead, just screams bubble to me. Its insane...

Who you mean, not me? I use WhatsApp daily, I have Viber and use Skype, but mainly for talking. Its not about that... A company that has one app and no profit valued like this, its a bubble.

Yup me too. For this exact reason I use WA. Services like that are here to stay, this is not in question here.

Mark Zukerberg has gone mad, he could have downloaded WhatsApp from Windows Phone Store for free, instead of paying $16 billion.

I wonder what is Microsoft doing to fight for the top spot .... Hopefully they have a plan for Skype.... This is such a powerful potential and yet Microsoft is so late on it... I'm keeping my fingers crossed for that to change with WP 8.1

I really want Microsoft to wake the hell up and create a giant out of Skype; the way there is no decent option to Office and Windows.

I'd love that too, but don't think it's going to happen. Knowing MSFT, they'll probaby end up changing its name, or discontinuing it, merging it with some other service, etc. It's kind of a constant change where things never get quite complete or ready.

I never understood the impatience and generalization done by people in this world. Win7, Xbox360, Office- are they incomplete? Good things take time to mature, you could argue otherwise.

I'm finding hilarious the amount of "oh, at least it wasn't Google" comments. Yeah. Because Facebook has a WP App produced by themselves or Instagram BETA is so actively developed by FB...

Better than nothing, which is pretty much what WP users get from Google, save the rarely updated search app or the very late arriving Waze (which probably wouldn't have come if it wasn't already in development)

No, but they probably wouldn't support it with any new features and its unlikely that they'd work with Nokia (as whatsapp had been) for access to special APIs. Facebook isn't the savior of whatsapp, but IMO is the lesser of two evils.

I don't see the value in it at this price, $16 Billion for a company that only has 1 app and service to offer with no real unique or added customer base to what Facebook probably already has makes no sense no matter how you cut it. They could have bought Blackberry for much less and not only gotten BBM but hardware, infrastructure and patents with value, THAT makes sense. Even if BBM doesn't have the install base it could have easily grown to surpass WhatsApp under the control of Facebook. A little ironic that Facebook value dropped and Blackberry went up after this announcement.

No it won't. People will move to 1 service which is the biggest and does all. People don't want to add people anymore. Thats why Whatsapp is such a success. Skype has an ancient method of connecting. It needs to register with phone number too. Without this, Skype will die.

It offers all contacts available from the first second. With Skype you start off with 0 contacts and then you have to ask everybody for their Skype. This is not how things work anymore.

Very well written, thought provoking.. Other than generating revenue by ads, subsrciption model may work in FB/whatsapp's favour.. Imagine the kind of revenue $1 can bring fr 1 billion users across different phone platforms..

Contrary to what Chris says, I think SMS is going to be around for longer than 5-10 years. Sure, maybe it's use will die, but I don't see it going away until regular voice service goes away. The cell data infrastructure needs a *lot* of beefing up first. For example, refer to any Verizon coverage map comparison ad.

They almost do already. The problem is the price they charge for pictures. That is what ruined it for the phone companies. Oh and paying more to text abroard. Most people us whatsapp as they can text and send pictures across borders. And once you start using those services, boom, they got you. Skype could have had this all sewn up by now.... Deja vu.

I agree with you.

Also about pricing, in Finland my plan is:
5000 minutes of calls in country
5000 sms/mms messages
Unlimited 21mb data
At some point I also had 5000min video calls too, never uses them though, so I dont know about that.

All this for 24,90eur a month...

Never used WhatsApp. I don't hear people in my life talk about it... which is a pretty broad age range 12-80 in the US. What is the typical demographic of a WhatsApp user? I like this article and the contrast to SMS makes sense to think about. I still can't get over how dumb the name is. Seems outdated and tired like an old beer commercial :)

Me, neither. No reason to add yet another form of communication. Holy Hell, how many messaging methods do we as a species need???

I have heard it and use it. My family and relatives that live outside the US in Mexico recognize it really well. I think on an international level it is one of the bigger messaging apps. I know in some countries it is more popular than others.

Use whatsapp daily, much cheaper than sms would cost me a fortune to keep in touch with friends abroad. Since neither of us use Facebook at all or video chat as we all work - whatsapp is much more convenient and less intrusive at work. Right now is either sink or swim for Ms with Skype (most of don't care about skype to lync calls), as there is another voip service - Viber - which i can see going for an insane price as well.

I don't think I'll bother, unless Facebook replace their chat back end with WApp. Currently I always send from my phone by SMS as that uses no data allowance (and so is free on most UK sub plans), messages can't be bugged and used by companies to sell at me and everyone has SMS. Facebook chat on my phone does the same, but uses data allowance so I generally only use it for incoming if on 3G. Everyone I know uses Facebook messaging. No-one I know uses WApp (UK). Currently on my phone I have SMS, Facebook, Microsoft Messenger chat and Skype. Do I really need yet another messaging app? Can't see the reason for it.

Bbm is not really cross platform (only bb, ios and android), heck whatsapp even have a Symbian client... Therefore whatsapp has a bigger reach compared to BBM. Blackberry had this chance too years ago but they blew it by keeping BBM confined.

To say that SMS is dead is pretty rediculous.  SMS has endured through AIM, MIM, ICQ and numerous other messaging apps.  SMS is by name "simple" and available to everyone.  Why does it need to improve?  Its just a text message and thats all its needed for.  I dont see the need for a 3rd party app with bells and whistles.   I can see potentially see a use for those in countries with pay-per-text plans but otherwise I dont get all the big hype about any 3rd-party messaging app.

It will die eventually. I receive less and less SMS text starting when the world using Blackberry phones, and now the only text I got are usually ads and from,people who don't like or don't bother to use any IM tool.

Too bad Microsoft didn't buy it, although Microsoft would of merged it into skype which is good and bad. I don't like that Facebook bought it, I left facebook a while back and haven't looked back. While it makes sense for facebook to be interested in whatsapp, I'd rather they didn't have access to my messages, photos and videos.

Seems to me that buying Viber would be a better choice, but then again, I don't run a multi fassillion company, so it just might be that I just don't have a clue

Chris, I enjoyed the article and your well reasoned opinions. Yet you made me gag with this line near the end:

"It's sort of like how Google can pay attention to keywords in your emails in order to serve useful ads at you,"

The term "useful ads" is Google PR speak for what they do in scanning, scraping, following, and monetizing data from users of their services. What they do is place ads, only you and I can determine if the ads are useful or not. Normally I'd be indifferent to the Facebook purchase of What'sApp. After learning that Google tried to purchase them I give three cheers to Zuk for keeping any service with that kind of data out of Google's hands.

A darn good job? Whatsapp simply offered the same service as all the other messaging apps except they didnt ask a monthly fee or showed any ads. Naturally this attracted customers. Who then invited friends. Friends who didnt mind switching from a paid or ad-heavy app to WA. From a business perspective it doesn' t make any sense. They were killing the chat market. Anyone can become marketleader when you start to give away stuff. But in today's world userbase counts for more than know-how and physical resources. You would almost think WA's business model had the line 'make profit by being sold to industry giant who is afraid to become irrelevant'.

This facebook buy of whatsapp, as a first thought, has mindboggling implications. I have mixed feelings about this announcement and analysis.

First of all I'm not getting a clear image of the real impact of these astronomical numbers. As a thought I can't help but wonder that represent something that is difficult to phathom and get a true sense of reality impact.

I wonder if the majority of facebook users will actually care. Sure shareholders will feel something, as perhaps end-users of whatsapp, but if facebook chat isn't doning well, what could convince facebook users to make the switch to whatsapp? Í like the thought of integration and a coherent experience, but I think the arugement is lost buy the fact that one talks more about capitol, earnings and 16 billion than actually talking about benefits for the end-user of both platforms. I feel sms is clouding the impact at hand.

It is because of this I'm worried about the future of whatsapp, and also not so sure sms will be dead per se. Certainly if the focus of the story will only be to make more money. I think the proof will be in the pudding. If facebook will show both to the public, shareholders and especially end-user that a serious amount of investment of this 16 billion will be put to good use in improving a sound, bug free coherent facebook-whatsapp package, I think the future will be bright. Otherwise I'm seeing this as the unfortuante deja-vue fate as in the case of motorola or webOS.

The impact is for example if Facebook continue with the sub model and charge say 2 dollars a year. The rate people are jumping onto whatsapp is insane, thus theoretically if the install base grew to a billion at 2 dollars per annum - it would equate to a gross profit of 2 billion. Then you have the possibility of ad targeting from whatsapp via Facebook therefore generating further profits. I doubt FB will start serving ads on whatsapp - (imo that is what killed ebuddy years ago-. However if they do start serving ads, they will ruin whatsapp and what it stands for - a simple, inexpensive and versatile messaging client that is ad free. In this day and age, everywhere you go you are blasted with ads so ad free space is a premium..

I don't know who I distrust more, Google or Facebook.

 

All I know is that at this juncture I am glad I have never used WhatsApp and I know for sure I never will. I know I am a single user and I won't change anything really but that's my position.

WhatsApp had zero revenue until recently when it launched a subscription model where some customers pay $1 a year to access the global messaging service that it provides.

I thought the android version alway had a subscription and only the iOS version got it recently?  

I don't think SMS will die...
In the USA people are tired of being CAP on DATA,Why would people use another data HOG,I don't even use this APP! people globally use this app cuz SMS is freaking expensive over there, when I was in the Philippines,SMS was charge 1 peso to send and received.. Until today majority of people living there are on prepaid plans that's where the operator makes their money...
With that being said, I THINK FACEBOOK is just playing heads up on this, with everybody starting to shift to smartphone with /DATA operators can pretty much cancel SMS and charge us for services like this that we don't need!!

Why on earth use whatsapp? The phone can send Messages.
It's like having an extra set of windshield wipers...
I don't get it!

Whatsapp seems like a prettier version of SMS, yet is slower. So unless I relied on SMS for life or death, I wouldn't pay for this app hell or high water.

With whatsapp when you purchase a new phone you already have all your contacts who use it, no need to ask for mail, username, etc. And you don't have any limitation as it uses WiFi or 3g so it's totally free. Oh and it doesn't tell u if someone is online or not, which is a relief. Tell me other app that has same features...maybe only wechat/viber/line but haven't used them really.

Chris, if you have used Line/WeChat before you will probably have a better guess at their acquisition, especially WeChat.

Line with their stickers ($1-$2) a set, Official celebrities account and promotion/deal/offer advertising via an Official Line account.

WeChat with their Moment (mini FB) and also advertising via official WeChat account, some extra subscription services.

Plenty of way to generate revenue instead of the measly $1 subscription, but the WeChat FB-esque feature might be the one they are going for.

Actually i think ms have every product they should. Altogether ms have skype for chatting, xbox for gaming, wp for mobile platform, and obviously social site like live, news like msn, music player like zune, live mail bing search engine and so on... But nothing is best in their segment except there old baby windows... Ms is just like a sleeping giant.. If they take their all platforms seriously then im sure other companies like scroogle, scrapple will bankrupt very soon :)

"They handle 19 billion sent messages and 34 billion received messages". I honestly don't understand this. If 19 billion messages are sent, only 19 billion are received right? How come there can be 34 billion? Does it have anything to do with the group chats?