Why Facebook bet the farm on WhatsApp

It’s beginning to look a lot like 1999 in the social media space.

Facebook’s offer to buy messaging app maker WhatsApp for US$16 billion in cash and stock, confirmed in a Securities and Exchange Commission filing yesterday, almost feels like the dot-com bubble thanks to a seemingly outsized offer whose value rests more on the size and potential of the target audience than any already-realized revenue performance. With an additional $3 billion in stock considerations for its founders and employees raising the total size of the acquisition to a staggering $19 billion, it ranks as the biggest deal in the history of social media, and a high-stakes bet in the company’s future direction.

Growing the mobile audience

It’s easy to understand why Facebook wanted WhatsApp. With 450 million monthly active users, it drives audience growth at a time when concern is growing over Facebook’s ability to build on its 1.23 billion user base. More critically, it gives Facebook even more legitimacy among mobile users, something Chairman and CEO Mark Zuckerberg has been focused on since before the company went public in 2012. Facebook, founded in 2004, has lagged mobile adoption rates of newer players like Twitter and Snapchat, and buying into the capability is a more linear strategy than trying to build on its existing Facebook Messenger offering.

At the core, WhatsApp has a far more solid business roadmap than the all-eyeballs, no-revenue-or-business-plan Internet companies that typified the overhyped late 1990s surge. WhatsApp sells for $0.99 on iOS devices. It is a free download on other platforms, including Android, BlackBerry and Windows Phone. Those users can try the app out for the first year, and are then charged $0.99 per year afterward. There are no ads.

The payoff for users is a simplified experience that dispenses with usernames and logins, and combines text messaging with enriched audio, photo and video-based messaging. The key to WhatsApp's growth is its seamlessness. Just grab a person's phone number and you're communicating, either individually or in groups, across any device and platform. It bypasses traditional texting plans by using increasingly affordable data plans in a data-efficient manner.

There's currency to this as the market becomes increasingly mobile. It's no longer about web apps or services. It's about easy ways for the mobile generation to remain connected, and WhatsApp does that with less friction than other messaging services. As Facebook looks to emerging markets to sustain its growth, this becomes even more crucial given some regions’ limited access to bandwidth.

Monetizing the back-end

This sounds great in theory. But even with growing subscription-based revenues, that’s nowhere near enough to justify a $19 billion buyout. So what else is there?


Mobile devices generate large volumes of it as users message each other. Data is the Internet equivalent of gold, and Facebook has always been an efficient aggregator of user-generated information. Location awareness adds even more value to the mix.

WhatsApp’s audience also skews young, which is a valuable counter to recent trends that are seeing teens leave Facebook in favour of Snapchat, Tumblr and other apps and services. Like Instagram before it - which Facebook snapped up for $1 billion in 2012 – Facebook once again takes the buy-not-build road to inject some coolness back into the service that seems to be trending older as it celebrates its 10th birthday.

Facebook’s mega-acquisition is already having a broader impact, with BlackBerry’s shares rising 7 per cent in pre-market trading. The reason: If Facebook has put a $19 billion price on WhatsApp’s 450 million users, then the value of BlackBerry Messenger’s 100 million users has also just gone up. Thanks to the Facebook/WhatsApp deal, BBM, which is now available for iOS and Android devices and includes the BBM Channels social media service, has suddenly become a jewel in BlackBerry’s crown.

While this no doubt brings some relief to Waterloo, Facebook is now challenged to convince investors it’ll be able to make back that $19 billion and then some. The pressure to deliver only intensifies from here.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca