Why Did Facebook Buy WhatsApp?

Four billion dollars in cash — that is how much the CEOs and founders of WhatsApp, a smartphone messaging app, will be scooping up. Facebook, the biggest social network in the world, just bought it. The Silicon Valley giant will pay another $12 billion in shares. As a future bonus for attaining good results within the next four years from today, add to that $3 billion in a bundle of shares, intended for the employees and founders of the company that has been taken over.

This is big money, reaching 10 percent of Facebook’s market cap, but is WhatsApp worth it?

It is just a simple smartphone messenger app, which cleverly combines our friends and contacts from various platforms. It also replaces texting. It allows you to chat, send photos, videos — but all in all, nothing unusual. The top Polish communicator, Gadu-Gadu, could do all of these things a decade ago. The only difference is that WhatsApp is a typical mobile app, designed specifically for touchscreens and uses all of their capabilities.

The world of the Internet is headed in the direction of mobile devices. Yahoo CEO Marissa Mayer tried to convince the masses at the recent forum in Davos that by the end of 2014, mostly mobile device users, rather than those sitting at PCs, will be using her portal. What’s more, Facebook defines itself today as a “mobile company” — Facebook apps generate the biggest amount of traffic, and the profits from advertisements have skyrocketed.

The increase in the number of registered accounts is also quite impressive. Four years after its launch, today WhatsApp has 450 million users. Facebook has 1.23 billion users, among them many children who think this app is cool and new, unlike ancient Facebook, where you can find your parents and an aunt from Sieradz — no offense to Sieradz. Mark Zuckerberg probably hopes that in this way, he will increase the number of people who use his company’s services on a daily basis.

After Wednesday’s transaction, there are now more millionaires in Silicon Valley than ever before. The founders of WhatsApp are an American, Brian Acton, and a Ukrainian, Jan Koum, both of whom had been working in Silicon Valley for many years and who met while programming for Yahoo, which they left in 2009 to establish their own business. They will continue to direct the further development of their application, as their team will retain a great deal of autonomy within Facebook. From this perspective, it resembles an alliance more than a classic corporate takeover.

Mark Zuckerberg has had a couple of episodes in his history, when he has showered either his partners or competitors with gold. Just before the initial public offering, he needed to demonstrate how mobile his company was becoming, so for $1 billion, he bought Instagram, a simple application used for taking pictures and adding artistic filters to them. At the time of the takeover, Instagram was installed on 30 million smartphones.

Simple math says that when taking over Instagram, Facebook paid $33 per single user, and when acquiring WhatsApp, the price rose to $42. Was it worth it?

There is a difference between Instagram and WhatsApp. The former is free and still does not quite know how to stay afloat — probably by means of ads. The latter assumes the payment of fees — although the first year is free as you are getting used to it, $1 will be charged for every year of use thereafter. The reason is that the business has to survive without cluttering the screen with banner ads. The founders of WhatsApp want to stick to the principle of no advertising as one of their key points. In a statement issued shortly after the transaction, they wrote the following: “Here’s what will change for you, our users: nothing.”

From Facebook’s point of view, for a company that offers a completely free service and survives thanks to advertising, this may seem like a hitch, but it can also be a great addition to the model for earning income. In the long run, if users don’t choose other “cooler” or “more hipster” applications as the free-of-charge year ends, WhatsApp will provide Facebook with a balance in its revenues.

Here’s probably the most important thing: Mark Zuckerberg got rid of his biggest competitor by buying it for $19 billion. He did it so quickly that his other competitors hardly had time to react — such as the Chinese owners of WeChat or the aforementioned Marissa Mayer from Yahoo. In a world that is increasingly based on communication, wielding the authority of an unquestioned leader can be worth big money.