It hasn’t been a bad few weeks for Jason Koum. From relatively anonymous startup founder to multi billionaire, the CEO of WhatsApp will look back on February 2014 as a life-changing period.
Facebook’s acquisition of the hugely successful messaging platform for an eventual $19 billion is, to most of us, an astonishing and grotesque sum. It goes down as one of the largest tech deals ever done and certainly the largest for Facebook.
In pure numerical format, Facebook is paying a princely sum for a bootstrapped mid stage startup, albeit one with 450 million users. WhatsApp is free for the first year, before users are asked to pay a 99c fee, and this is ostensibly its only revenue stream – the platform currently does not feature advertising.
Neither is the app the only player in the ‘private’ messaging space. Viber, Line, Snapchat and WeChat are all strong competitors with growing bases.
But here’s the kicker. If you ignore the unfathomable valuation for a second, as oxymoronic as that may sound, there’s a very clear method to the madness.
Rather than purchasing a company based on its revenues alone, Facebook is concentrating on hedging itself against the choppy waters of social trends.
The world’s largest social brand is not immune to a changing landscape, and in a highly connected, fast-paced marketplace, customers go where they want. Losing relevancy is the fastest way to the poor house in this game.
Having passed its 10th birthday, the company is even more aware of the ghosts of MySpace and Bebo, and with consternation around slowing usage within the younger demographic, plus a stagnating userbase for the first time, this purchase is foremost an insulator against any perceived lack of credibility.
Of course, WhatsApp is a also genuine phenomenon. With only 55 employees, it’s the perfect ‘lean startup’ to integrate into Facebook’s notoriously nimble culture. It has grown to overtake text messaging and 72% of its users are active every day. This in turn brings its own monetisation opportunities, but perhaps most importantly, proffers a market-leading foothold for Facebook in a ‘social’ category that it doesn’t currently excel.
Facebook understands the true value of people communicating with each other on their mobile phones through messaging. With user habits rapidly shifting from desktop to mobile (over 50% of Facebook’s revenue now comes from mobile), it wants to further embed itself into the communication layer of the mobile.
WhatsApp’s users are also highly engaged – only SMS and Facebook Messanger can claim similar levels (20+ messages per day) and this further enhances the proposition.
For brands, the opportunities arising from this deal will become clearer soon, but think of the mounds of data Facebook will now have access to should it choose to advertise on Whats App, and let’s not forget Instagram. Theoretically, the opportunity to create hyper relevant adverts and the targeting choices available via an integrated ad platform would be mouthwatering.
And of course, there’s also the ‘you can’t have it if I have it’ angle to all of this. The purchase removes the possibility of a competitor purchase of WhatsApp and also the possibility of the app becoming ‘bigger than Facebook’.
When you take the above into account, and remember that the price is a mere 10% of Facebook’s current market valuation, grabbing control of WhatsApp starts to make sense.
Combined, Facebook, Instragram and WhatsApp will create an ecosystem of close to 2 billion active users (allowing for overlaps).
Is it a calculated gamble? Perhaps, but when your company is worth close to 200 billion itself, and your stated mission is to ‘make the world more open and connected’, that might just be a risk worth taking.
Originally written for Marketing Magazine