WhatsApp deal expands Facebook worldwide

Many were shocked at Facebook's $19 billion acquisition of mobile messaging app WhatsApp. But a closer look at the product, and what this means for the worldwide messaging industry, provides some insight into Facebook's motivation.

Dado Ruvic/Reuters
Facebook Inc. will buy fast-growing mobile-messaging start-up WhatsApp for $19 billion in cash and stock in a landmark deal that places the world's largest social network closer to the heart of mobile communications and may bring younger users into the fold. A Whatsapp App logo is seen behind a Samsung Galaxy S4 phone that is logged on to Facebook in the central Bosnian town of Zenica, Feb. 20.

If you didn’t know what WhatsApp was before Wednesday, it’s likely you know what it is today. A $19 billion price tag has a way of demanding attention.

That’s how much Facebook paid for Silicon Valley-based instant messaging platform WhatsApp on Feb. 19, through a combination of cash and stocks. The multiplatform messaging app, which uses Wi-Fi to transmit messages all over the world at no cost, has more than 450 million users and reportedly is adding 1 million more per day. With such exponential growth, and now a major acquisition, the tech world is left wondering what this means for WhatsApp, Facebook, and messaging platforms around the world.

"WhatsApp is on a path to connect 1 billion people. The services that reach that milestone are all incredibly valuable," says Mark Zuckerberg, Facebook founder and chief executive officer in a release. "I've known Jan [Koum, WhatsApp co-founder and CEO,] for a long time and I'm excited to partner with him and his team to make the world more open and connected."

Mr. Koum adds, “WhatsApp's extremely high user engagement and rapid growth are driven by the simple, powerful and instantaneous messaging capabilities we provide. We're excited and honored to partner with Mark and Facebook as we continue to bring our product to more people around the world.”

Notice how both Mr. Zuckerberg and Koum used “world”? That’s key. WhatsApp lets users send text, video, or audio messages using Wi-Fi, therefore circumventing normal texting charges. In this way, WhatsApp is particularly helpful for people who have friends or family in various countries (like many Europeans) or for people who live in less developed regions of the world, where telecom fees can be complicated and expensive. Plus, it’s affordable: WhatsApp is free for the first year of use, and $0.99 per year after that. This is also why, if you and the people you communicate with mostly live in the US, you may not have previously realized the value of WhatsApp.

Its lack of presence in the US is actually what makes this WhatsApp purchase so interesting. It’s no secret that Facebook is aiming to capture the mobile messaging industry with its recent $1 billion Instagram acquisition, a spurned $3 billion Snapchat offer, and Facebook messaging and app updates, but the WhatsApp purchase seems to be a nod to the growing importance of messaging around the world. WhatsApp says it processes as many as 27 billion messages per day.

But how WhatsApp and Facebook will drive this global connectivity is a bit less clear. As part of the deal, Koum is joining the Facebook board, which should make for some contentious conversations about the future of the service. Facebook largely drives its revenue through ads, something Koum has spoken out about strongly in the past, like in this blog post he wrote in June 2012:

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… Advertising isn’t just the disruption of aesthetics, the insults to your intelligence and the interruption of your train of thought.

Along these lines, WhatsApp doesn’t collect any data on customers aside from telephone numbers. Will $19 billion change his mind? For now, Facebook says WhatsApp will remain a standalone app; its brand and headquarters will remain the same.

This move also doesn’t mean Facebook has monopolized the mobile messaging industry. China’s WeChat, Japan’s Line, and South Korea’s Kakao are all wildly popular messaging services rapidly diversifying their offerings, as well as reaching out to non-Asian markets. WeChat, for example, is spending $200 million to market its service to the rest of the world, and is valued at more than $30 billion, according to a Barclays analyst

And that isn't to say US analysts are thrilled with the purchase either. Facebook stock dropped 2 percent in morning trading Thursday after the news was announced, signaling worry from investors who were already apprehensive about the $1 billion Instagram acquisition.

“In hindsight, the Instagram deal at $1 billion now looks very good, despite the initial criticism,” says Ben Schachter, a Macquarie Securities analyst, to the Los Angeles Times. “That is not to say that the WhatsApp deal will turn out to be a home run, but the lofty valuation could end up looking more attractive over time.”

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