Technology

Why Facebook Just Spent $19 Billion on a Messaging App

Facebook wants to dominate in the three areas WhatsApp excels in: apps, messaging, and usage in the developing world.

By Robinson Meyer
Reuters
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Updated, Thursday 2:30 p.m.

Late Wednesday, Facebook announced its purchase of WhatsApp for $16 billion. $4 billion in cash and $12 billion in Facebook stock were granted to the company, with an additional $3 billion worth of Facebook stock to come.

WhatsApp makes a glorified texting app. It lets you send text and pictures to another WhatsApp user’s phone. Free to use for the first year, it costs $1 annually after that.

Why, you may be wondering, would Facebook spend $19 billion on it?

Courtesy “Nick,” who—seriously, yes—
did screenshot this and text it to me.

To answer, it helps to tell a story about two of my friends. They’re dating. Last year, one of them—we’ll call him Nick—lived in the small African nation of Lesotho. The other—we’ll call her Julie—lived in Chicago. This year, they switched. Nick lives in New York City. Julie lives in Mumbai.

On the home screen of Nick’s iPhone (at right), there aren’t many apps. There’s Google Maps, Gmail, a camera. There are three social networks—Twitter, Facebook, Instagram—of which Facebook owns two.

And there’s WhatsApp. WhatsApp lets Nick and Julie text and send pictures across international borders, skirting international SMS fees and only paying for the cost of data. They both use it daily.

They aren’t the only ones. In December, WhatsApp announced it had reached 400 million active monthly users, with 100 million of them having joined since just September. It’s now up to 450 million monthly active users. According to Facebook’s Wednesday filing with the U.S. Securities and Exchange Commission, 70 percent of those people are active on a single day, and 1 million people download WhatsApp every day.

That’s 315 million people using WhatsApp every day. In the same filing, Facebook claims that the amount of data that passes through WhatsApp rivals “the entire global telecom SMS volume.”

(For reference, by the way, Facebook said it had 945 million monthly active users for its own, non-WhatsApp mobile* services in January.)

But is it worth $19 billion? No one’s really sure. But as John Herrman writes at Buzzfeed, WhatsApp was “one of the only services that could plausibly claim to be cannibalizing Facebook on a large scale, and one of a small few that pose it an existential threat.”

What’s more, buying WhatsApp fits into a pattern that’s emerged from Facebook. For me, there are three clear reasons why Facebook spent crazy money on the new messaging giant.

1. Facebook wants to dominate among mobile apps. Facebook has a history  of simply up and buying mobile apps when they start to dominate. It bought Instagram in April 2012 for $1 billion. It tried to buy Snapchat for $3 billion. And—as Herrman has reported—it spent $100 million last fall to buy the best mobile app analytics usage firm. If an app has tons of mobile users, Facebook knows, perhaps before almost anyone else.

It’s this same, mobile app-focused strategy that led it to release Paper early this month. Paper is a newsreading app, but it’s also simply a better mobile version of Facebook. It’s Facebook content through a new, designified lens—and it heralds a new “multi-app strategy,” wherein Facebook lets many different kinds of apps spring from its walled garden.

Facebook has a history of buying successful mobile apps, especially those with a social component. WhatsApp is a bananas successful mobile app. Ergo…

2. Facebook wants to dominate in messaging apps. It’s not yet a sure thing that Facebook users will keep wanting to, er, Facebook: to engage in the daily exchange of pictures, status updates, and wall posts that keep the social network feeling fertile. (That might be part of the reason why the service has started to display more links to news stories on its News Feed: Web publishers are already making a product, on a daily basis, that’s meant to engage users.)

But messaging: People always have to chat with each other. And while messaging apps rise and fall quickly (when was the last time you AIM’d someone?), they also offer an enduring source of engagement. And if you can lock in users—lock in enough of people’s real-life social networks that there’s little reason to stray from the app—it doesn’t matter if other, better apps come along.

Messaging apps are also one of the few parts of the social web that grew over the past two years. It’s in response to WhatsApp, Snapchat, and the Chinese-centric WeChat that Twitter improved its direct messaging feature in December, after years of neglect. It’s in response to the same that Instagram created a direct photo messaging feature. Both Twitter and Facebook responded to WhatsApp and Snapchat by making it easier to privately send photos to other users.

Is anyone using their services? We don’t know. But we do know that, as of October, people sent 400 million photos every day over WhatsApp.

3. Facebook wants to dominate in the developing world.

Facebook, like many of the major social networks, may have maxed out its membership among U.S. users. There simply aren’t many people who have yet to join who will ever join. The only place Facebook has left to grow is the developing world.

It’s already trying to grab users there. As Christopher Mims at our sister publication Quartz has detailed, Facebook makes many of its basic features free on non-smartphones using an old web protocol. This version of the service, called Facebook Zero, won it fast growth in 2012 in places like Nigeria, Ghana, and Kenya. The social network tried other strategies, like partnering with mobile phone companies and creating Facebook-specific apps, to gain users in Mexico.

Since then, WhatsApp has won users in those places. In May 2013, Forrester research analyst Charles Golvin told Buzzfeed’s Charlie Warzel the following: “In places like Brazil, Mexico, Spain, and a number of other markets you see extraordinary numbers. Twenty-five percent of the time people spend on smartphones, they’re spending in WhatsApp.”

WhatsApp, in those countries, has often replaced SMS. (SMS charges everywhere can be exorbitant.) WhatsApp—with text and photo-sharing—is the rising social network Facebook wanted to be.

What’s more, WhatsApp often connects Western users with their friends in the developing world. Think of Nick and Julie above: WhatsApp is the link between two American Facebook users, each with a social network in India and Lesotho, respectively. If you’re trying to find users to whom you can show expensive ads, following the connections—from the U.S., out—isn’t a bad strategy.

That said, $16 billion—and maybe $19 billion, eventually—is a huge, insane amount of money.

So: Will WhatsApp keep growing? Will it give Zuckerberg better footing in in the developing world? And will it let Facebook make money from phones the same way it used to make money from desktops, and lock in the 10 year-old giant as not only the winner of the great social era (2004–2012), but the great mobile era (2012–?), too?

What’s more: Is a texting app, with security problems, that routes cheaply around a service which Internet providers charge for, really worth more than a company that transports people across the country, in gigantic, metal, flying ships?

Now we find out.

* The original version of this article identified Facebook’s number of monthly active mobile users as its number of monthly active users overall.