February 26, 2014 | By: Raj Dubey | 3 min read

By now, you’ve probably heard the announcement that Facebook is acquiring messaging service WhatsApp for $19 billion. Just reading that headline alone, three things immediately come to mind:

  • What’s WhatsApp?
  • $19 billion? That’s a boatload of money. No, not even a boat - that’s more like a yachtload. No, a submarineload. No, an aircraft-carrier-load. (I could keep going, but I’ll spare you any more bad nautical puns).
  • Didn’t Facebook pay $1 billion for Instagram? And didn’t they just offer $3 billion for Snapchat?

So, naturally, the best way to try and figure out the answers to these knee-jerk questions is to tackle them one-by-one.

What’s up with WhatsApp?

WhatsApp was founded in 2009 by Jan Koum and Brian Acton, two Silicon Valley veterans with exceptional pedigrees (Koum having served as a VP of Engineering at Yahoo and Acton a former Apple product tester). As the story goes, Koum was bothered by his local gym’s ban on cell phone usage, so he sought to create a messaging platform that would integrate with one’s contact list in a format reminiscent of the iPhone. Most important, though, was a strong aversion to any gimmicky ads that plagued other apps.

Why would they steer away from the advertising model that seemed to be the life force for other apps? Fast Company paraphrases their methodology best: "If your revenue comes from advertising, you'll have engineers dedicated to making better ads. But if you bring in revenue via payments...your team will build better user experiences.” As it stands now, WhatsApp charges users a $1 annual subscription to use the service. Meanwhile, Facebook has vehemently towed the line over its history that users will never, ever have to pay for their profiles. Keep this in mind.

Ok, we’ve established what it is. But why is Facebook interested?

WhatsApp saw its popularity soar from the onset, and it never looked back. Looking at its user statistics, the picture becomes clearer:

  • WhatsApp adds 1 million users per day.
  • WhatsApp is projected to hit 1 billion users sometime in 2015.
  • WhatsApp users share 600 million photos per day.
  • 70% of WhatsApp users are active every day.

Now let’s compare that to Facebook:

  • Facebook adds 432,000 users per day.
  • Facebook currently sits at 1.23 billion total users.
  • Facebook users share 350 million photos per day.
  • 62% of Facebook users are active every day.

Given those impressive figures, it begins to make sense that WhatsApp would be on Facebook’s radar. But even with a strong, active, and rapidly growing user base, $19 billion sure seems like a lot. For that much, Facebook could have theoretically acquired the entire Sony Corporation. Or the country of Honduras.

How do Instagram and Snapchat play into this decision?

Now’s where we have to make a few educated guesses about Facebook’s rationale. In order to do so, it’s best to rewind to August 2012 when Facebook purchased Instagram. It’s fair to say at the time the decision wasn’t universally well received. Skeptics abound wondered why such a valuation could be placed on an app that seemed to do little more than add filters to everyone's selfies.

Fast forward two years later: Instagram’s user base has grown from 30 million to 150 million, a 5 times increase. 55 million photos are being shared via the platform per day. Ads have been introduced, and although they didn’t initially receive universal acclaim, they seem to be working. From a dollar-per-user-acquired standpoint, the purchase has proven profitable. They paid $30 per user for Instagram, which seems like a pittance compared to LinkedIn’s $153 per user or Twitter’s $140 per user.

Facebook, having achieved a form of dominance in the social interaction space, clearly realized that the next frontier was mobile. After Instagram’s continued success, the goal shifted to grow that particular subset of their user base. But they quickly realized people weren’t just publishing photos. In fact, users seemed to prefer sharing those photos within a personal setting rather than broadcasting for all the world to see. Enter Snapchat.

It’s no news that Snapchat brazenly rebuffed Facebook’s $3 billion offer last year. It’s important to note that Facebook’s decision to arrive at such a lofty number was likely influenced by their concern that the Poke application wasn’t gaining the desired traction. But for Evan Spiegel, Snapchat’s co-founder, to spurn Facebook the same way Zuck did to Microsoft so many years ago? Surely that had to hurt.

Poke flopped. Spiegel bragged. Facebook continued to see numbers pointing toward mobile traffic eclipsing desktop traffic in years to come. It became do-or-die for Facebook, and desperation can get expensive. Shelling out 10% of the company’s value for WhatsApp’s well-proven numbers probably looked better and better by the day.

The Verdict

It’s hard to say because Facebook was successful after the $1 billion Instagram acquisition that they’ll be able to navigate another one 20-times larger without some growing pains. But you have to applaud their willingness to adapt. Facebook has clearly identified mobile as a strategic priority, and they are willing to foot the bill in order to chase continued growth.

Most importantly, remember, they just acquired a messenger service that will soon reach 1 billion users. And WhatsApp-ers are willing to pay $1 per year in subscription fees. More over, they actively engage their companions at a rate that could top Facebook’s in years to come.

However, one can’t deny Facebook appears to be keeping their word: We may never have to pay for our profiles, but whoever said they promised free messaging?

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