Why Facebook Acquired WhatsApp for $19 billion
In February of 2014, Facebook announced its plans to acquire the messaging company WhatsApp for $19 Billion, making it the second largest acquisition in history.
WhatsApp is the most popular messaging app ever, with over 2B users across the world. In 2018, there were roughly 65 Billion messages sent on WhatsApp per day, which is a little more than 45M messages every minute.
A key ingredient to WhatsApp’s success was timing: WhatsApp was founded in 2009, very soon after Apple and Google launched their App stores. Messaging is a basic block of the internet, and WhatsApp was around to fulfill this need right at the start of the mobile app age.
Today, we are able to take free messaging as a given, but in 2009, mobile messaging was mostly done through SMS, which is much clunkier, and not free. WhatsApp made the process for joining mostly frictionless — all you need is a basic smartphone and an internet connection. To message someone from anywhere in the world, all you need is their phone number — no email address, username, QR code or friendship needed.
In a lot of countries, such as India — this has allowed WhatsApp to dominate.
Facebook doesn’t show ads on WhatsApp, nor do they charge users a subscription fee. In fact, WhatsApp hardly makes any money for Facebook at all.
So why in the world did Facebook pay so much for WhatsApp?
Facebook has around 2.5 billion monthly active users. A lot of people who don’t have Facebook live in developing parts of the world, where the Internet is a luxury that not everyone has access to. In India, for example, there are millions of people who use WhatsApp every day, but have no access to the rest of the Internet, because phone providers offer very cheap WhatsApp-only data plans.
A user base like this is a great source of untapped potential for Facebook to acquire it’s N.B.U or Next Billion Users.
Facebook makes its money through targeted Ads. More users equals more money, and more clicks equals more money.
There are no ads on WhatsApp for now, but there are billions of active users, and lots of data. Although Facebook does not currently use WhatsApp data to improve their ads on other platforms, its certainly an option they have, if they choose to exercise it. The user data from billions of messages sent every day means that Facebook can improve their targeting, which would lead to more clicks, and in turn, more money. When you operate on the scale that Facebook does, even incremental improvements in ad targeting can mean billions of additional dollars in revenue.
But there’s also another strategic reason for this acquisition. Although they wouldn’t use the word, Facebook is effectively a monopolist in the social network space.
In any monopoly, a high barrier to entry is important to protect the monopolist’s position. Social networks intrinsically have a high barrier to entry because of the Network Effect — which gives a product or service more value when more people are using it. Social Networks are not valuable if there are not enough people on it, which makes them very hard to start.
However, with WhatsApps active user numbers, it no longer had this barrier to entry. WhatsApp was already a direct competitor to the Messenger app. But as a fast-growing company with billions of active users, it also posed a potential future threat to Facebook, making it a formidable competitor.
For example, if WhatsApp kept expanding on their offerings, as is natural for a growing software company, one of their next logical moves might be to add a story feature, or make a new tab for WhatsApp posts and statuses, all of which threaten to steal content and engagement from Facebook and Instagram.
By acquiring WhatsApp, Facebook effectively secured its seat on the social networking throne. But now, it faces a similar threat from TikTok.
Every minute people spend on TikTok is a minute they could have spent on Instagram. Facebook’s platform is only as valuable as the amount of time people spend on it.
Facebook has launched a competitor to TikTok called Reels. The headwinds against TikTok because of its affiliation with China are good news for Facebook, but still has a long road ahead convincing TikTok’s devoted user base to switch over.
