Why Facebook founder had to buy WhatsApp

Opinion: With 450 million active users, it has become the biggest messaging service in the world

Never in the history of technology acquisitions has a company’s name been so apt. “What’s the WhatsApp app?” was the tongue-twister on a lot of people’s lips on Wednesday night as news broke of Facebook’s astonishing $19 billion deal to buy the small but hugely successful messaging company WhatsApp.

The deal is astonishing for many reasons, and more than just the collective sticker shock prompted by the price Facebook founder Mark Zuckerberg was willing to pay for it – $4 billion in cash, $12 billion in Facebook stock, with an additional $3 billion in restricted stock units for WhatsApp employees.

WhatsApp is a genuine phenomenon – at first glance it’s a rather basic cross-platform messaging app, offering little more than the text messaging app already installed on your smartphone. But once you have downloaded WhatsApp, you can send unlimited messages to other WhatsApp users, all for a nominal $1 annual fee.

This is a winning formula – with 450 million active users each month, a million new sign-ups per day and a whopping 72 per cent of its users active on the service every day, handling about 50 billion messages and 500 million photographs, WhatsApp has rapidly grown to become the biggest messaging service in the world, with massive penetration in large developed markets, such as Europe, and even larger developing markets, such as India. The clearest illustration of its phenomenal growth came earlier this year, when the number of messages sent on WhatsApp every day overtook the number of plain old SMS text messages sent all over the globe. What's more, the company is the very epitome of "fast and nimble" – WhatsApp will turn five on Monday and has just 55 employees.


But for all that success, the reason a lot of people had never heard of WhatsApp before is because the company's founders have deliberately shunned the limelight. Jan Koum, a Ukrainian native who moved to California as a teenager, and Brian Acton met while working at Yahoo, and built WhatsApp with a defiantly anti-advertising, pro-privacy ethos. Unlike every other eager start-up desperate for attention, they avoided publicity.

“Marketing and press kicks up dust,” said Koum. “It gets in your eye, and then you’re not focusing on the product.” They didn’t even put a sign up on their Mountain View offices, with Koum describing it as “an ego boost”. “We all know where we work,” he put it succinctly, suggesting a rather admirable determination to avoid the distracting trappings of the Silicon Valley start-up culture.

Tech bubble
But now that Zuckerberg has signed a cheque with enough room for lots and lots of zeros, WhatsApp is a household name rather than just another generic messaging app. The price was seen by many as concrete proof that a tech bubble is under way – after all, the money involved towers over the $13 billion or so the UN asked for humanitarian relief operations in 2014 and would be enough to fund a dozen or more space rover missions around the solar system if Nasa were so inclined.

In that light, sure, it appears as if Mark Zuckerberg has taken leave of his senses. Indeed, there is every chance that
WhatsApp will usurp the Dutch tulip as a cautionary symbol of irrational speculative hysteria, a monument to the folly of market-based bubbles.

On the other hand, perhaps it is more instructive to see this acquisition as a forecast of the scale of smartphone growth. In terms of the development of the mobile computing industry, we are at the “foothills of the Himalayas” stage – we are only beginning to perceive how a computer in everyone’s pocket is going to change, well, everything.

The room for growth is predicated on two things – the vast untapped market in the developing world, and the effect of Moore’s Law, which predicts that semiconductors can double in power every two years. That exponential growth in processing power ultimately leads to dramatically lower prices, thereby making smartphones affordable in parts of the world where they are currently a luxury.

Mobile, then, is clearly the next computing platform and it will dwarf the traditional desktop internet – the total number of smartphones is due to surpass the total number of PCs by the end of the year.

There will not only be lots more smartphones than traditional computers, but we will be interacting with them far more than we ever did with PCs, the so-called personal computer that feels entirely impersonal in comparison to the smartphone. Above all, a large part of that usage will be communicating with each other – humans are very social animals, after all.

Zuckerberg clearly sees this prospect, and is determined that Facebook will fulfil the stated mission he set out for it – “to give people the power to share and make the world more open and connected”. That sounds nice and fluffy, but it’s evident he wants to own the communications layer on the mobile internet, and that involves lots of myriad pieces.

Facebook itself, the venerable social network with a news feed and status updates, is only one part of that equation – it has evolved into a public one-to-many communication system. WhatsApp has already established itself as the world's foremost private one-to-one communication system. (Though it's important to note that rivals such as Line and WeChat are more successful in different territories, such as China and Japan – there is every chance mobile messaging will be highly geographically segmented.)

Given the future scale of the mobile internet, Zuckerberg could not afford to let WhatsApp grow to the point where it had one billion, two billion, three billion users, draining Facebook of attention and rendering it largely irrelevant in terms of global communications. For the sake of 10 per cent of Facebook’s current market valuation, getting hold of WhatsApp now makes some sort of sense – basically, Zuckerberg is avoiding the risk of low-end disruption by buying anything that gets large enough to threaten Facebook’s future communications hegemony. The big question is not whether this is evidence of a bubble, but whether such a strategy is sustainable.

Finally, however, perhaps the most valuable lesson is the one hiding in plain sight – WhatsApp’s acquisition has demonstrated that the correlation between the success of any given product and the ingenuity of its name is negligible. The deal raises many important questions, but “What’s the WhatsApp app?” is no longer one of them.