Why did Facebook spend $19 billion to buy WhatsApp?

facebook-original
One of the earliest Facebook designs

I love to follow technology. I am constantly loading websites like The Verge and Engadget to consume every last bit of tech news and pulling to refresh Twitter to catch every single one of the quirky tweets by journalists. Twitter is the first app I open everyday when I wake up, unless I have a WhatsApp message. Wednesday was a holiday for me, and I went trekking. When I came back home, I was too tired and went to bed. I did not go online.

On Thursday morning, at around 8 am IST, I woke up and connected my phone to my home WiFi. WhatsApp exploded. 700 messages from 10 conversations. I was wondering what was going on, just to read message after message about Facebook spending $19 billion to buy out WhatsApp. I was stunned. I ran to my desktop to read the news, to get a sense of what was happening. To confirm that this was not an elaborate prank.

Alas, it was real. “Facebook is buying WhatsApp for $16 billion” was The Verge’s headline. “Facebook Buying WhatsApp For $19B, Will Keep The Messaging Service Independent” said TechCrunch. For the last few days I’ve been trying to make sense of why did Facebook spend 35% of its cash on WhatsApp and what this means for the messaging market in general. Here’s my take on the matter:

Screenshot_2014-02-24-20-39-17

When Mark Zuckerberg and a group of his friends launched Facebook, they launched it with one motto: “Connect the world’s people”. At the time the phrase might have seemed very good-hearted, but it always meant more. It always meant controlling how people of this world connect, which sounds more like a corporate strategy. And that is what Facebook always was. A corporation. When Facebook launched, most people were quick to dismiss it as a MySpace clone. What made FB popular at that time was that it was ‘cooler’ than MySpace. A start-up by a group of Harvard students with a passion to connect the world. Facebook grew faster than any other social network ever, and now it is 1.2 billion people strong. 60% of people who are online are on Facebook. In an attempt to attract more users, Facebook launched Internet.org, an initiative to get more people online. Facebook was becoming unassailable. So what happened?

Mobile messaging.

When Facebook was counting money with its primarily desktop-first interface, they made a huge bet on web apps for mobile. Both Android and iOS had HTML5-based Facebook apps. Facebook Messenger had a clunky UI and wasn’t really paid much attention to. That was the time when mobile messaging started to happen. WhatsApp, Kakao Talk, Line, Viber and a host of other apps launched on mobile with a singular vision-to make messaging simple. Signing up for these apps was as simple as entering your phone number. Convincing friends to stick with one app was easy. The network effect, which was once instrumental to Facebook’s rise, became the deciding factor in this new world of cross-platform messaging.

WhatsApp grew because of one differentiating factor – No ads. WhatsApp co-founders, Jan Koum and Brain Acton were ex-Yahoo employees who were smothered by the business of making money through advertisements. They launched WhatsApp in 2009. WhatsApp quickly became popular owing to a simplistic interface and a relatively low yearly subscription fee. Facebook by that time realised the market they had missed. After making native apps for mobile platforms, they focussed on Facebook Messenger, trying to get back users who once used Facebook extensively for all social connections, are now using these messaging apps for chatting. They launched a gorgeous new interface for Facebook Messenger, and a great new feature, called ‘Chat Heads’ on Android.

But that did not seem to buckle the ongoing trend. Facebook just wasn’t cool any more. In a bid to get back into the integral digital life of the young population, they bought the photo sharing start-up Instagram for $1 billion, an amount which sounded crazy back in 2012. Messaging still remained an important missing piece in Facebook’s mission. So what did they do? They spent a third of their cash reserves and a tenth of their overall market cap to buy WhatsApp, the biggest, and more importantly, the fastest growing messaging app among the lot. But why did they have to spend so much cash on one player, in an area where the network effect is not that pronounced and trends change in a whim?

“If you can’t beat ’em, join ’em.”

Or in Facebook’s case, buy ’em. WhatsApp has a unique appeal in this market, being on every platform known to the world. WhatsApp has an app for iOS, Android, Windows Phone, Blackberry 10, Blackberry 7 and Symbian. Heck, they even have a J2ME app to work on feature phones. This helped WhatsApp grow faster than any other app. It effectively became a social network of sorts. WhatsApp became the first ‘social network’ to grow faster than Facebook. Even with total users half of that of Facebook, WhatsApp had more DAUs (Daily active users) than Facebook. WhatsApp was poised to become the next biggest social network. Facebook was going to get ‘MySpaced’ by WhatsApp.

WhatsApp's extraordinary growth

So in my view, there are two line of thoughts to look at this acquisition- as an Optimist, and as a Sceptic.

Optimist

Facebook sees mobile messaging as the next wave of social connections and wants a piece of that pie. With a blockbuster IPO, they had enough cash on hand and saw this acquisition as a logical entry to this field. WhatsApp has contacts information of more than 450 million people in the world and for Facebook, this information is invaluable.

Sceptic

If anything is going to kill Facebook, it’s going to be WhatsApp. So lets buy them before they get too big. Facebook tried several times to buy Twitter, but failed every single time. They did not want to miss this opportunity. After being rejected a $3 billion offer from Snapchat, they could not miss out on this opportunity. How to avoid being myspaced? Buy your closest competitor, and keep the competition at bay.

Me? I’m 60% optimist, but will definitely be watching this field very closely. Facebook was the app I used the most before WhatsApp. Now WhatsApp is one of the most used apps on my phone, along with Twitter. Facebook just bought one of them. Is Facebook just trying to be cool again? Or are they just forcing me to use the service. Only time will tell. Facebook just needs to remember one important thing- Your audience is not loyal. They can and will flee at any small error you make. Spending money to buy companies is easy. Keeping them enticed and entrenched in your service is the more difficult part.

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2 thoughts on “Why did Facebook spend $19 billion to buy WhatsApp?

    1. Actually that is one of the main reasons why Facebook bought Whatsapp. Phone numbers and more importantly contact information of all your friends is invaluable for a company like Facebook.

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