Why did Facebook pay $19bn for WhatsApp?

Late yesterday, Facebook acquired WhatsApp for the princely (and ludicrous) sum of $19 billion (£11.4 billion) in cash and stock. This is one of the largest acquisitions in Silicon Valley history – and yet, if you’re American, you probably don’t even know what WhatsApp is, let alone why it’s worth such a staggering sum.

In a sentence, WhatsApp replaces text messaging (SMS) – and it has grown to 450 million monthly users in under five years. While a purchase price of $19 billion (£11.4 billion) might seem like insanity, especially when compared to its $1 billion (£600 million) acquisition of Instagram, it’s actually a savvy (or desperate, depending on your point of view) move to ensure that Facebook remains the world’s predominant messaging platform.

What is WhatsApp?

The short answer is that WhatsApp is a replacement for SMS (texting) for every major mobile platform (iOS, Android, Symbian, Windows Phone, BlackBerry) – but it also allows you to send photos, videos, and audio clips as well. Because it uses the Internet, and thus your data package, it avoids the crazy fees that some carriers charge for SMS. WhatsApp has done for instant messaging what Skype did for international calling, basically.

If you’re in America, you probably haven’t heard of WhatsApp because it hasn’t yet become popular in the US. However, it is incredibly popular in the rest of the world – most notably in Europe, but also in the all-important developing economies of Africa and Asia.

The growth rate of WhatsApp has been utterly insane: In November 2013 it had 190 million monthly active users; today, it has 450 million active users and 320 million daily active users, with 1 million new users joining every day. Upwards of 50 billion text messages are sent and received by WhatsApp every 24 hours (more than doubling Facebook’s usage), along with hundreds of millions of photos and video messages. WhatsApp is huge.

In terms of monetisation, WhatsApp is free for the first year, and then $1 (60p) per year after that. There is no advertising. The entire service is developed and maintained by less than 50 employees. The company has never spent a penny on marketing. WhatsApp is a classic example of identifying a gap in the market, and then producing a very simple app that perfectly fulfils that need. (The back-end – which is probably one of the busiest databases in the world – is programmed in Erlang, incidentally).

So why did Facebook fork out so much cash?

Depending on how cynical you are, there are a few answers to this question. The most likely answer is: Facebook is terrified of losing its position as the world’s primary social network and messaging platform. Instagram threatened Facebook’s role as the best place to share photos, and Facebook scooped it up. WhatsApp, which already dwarfs Twitter, Skype, and Facebook Messenger in terms of users and usage, was probably keeping Zuckerberg up at night – thus the acquisition.

“WhatsApp is the only app we’ve ever seen with higher engagement than Facebook itself,” Zuckerberg said during a conference call yesterday.

At the end of the day, though, spending $19 billion (£11.4 billion) – which is more than 10 per cent of Facebook’s total market valuation – without a clear purpose in mind is a big pill for Facebook’s shareholders to swallow. (Incidentally, Google reportedly offered $10 billion – £6 billion – for WhatsApp, but was turned down).

Having said that, considering carriers squeeze billions every year out of SMS, maybe $19 billion (£11.4 billion) is actually a small price to pay for a big slice of that pie – maybe this is actually a sign that Facebook is diversifying, in case the bottom falls out of the advertising market.

Ultimately, Facebook is paying a lot of money to make sure that the bulk of the world’s communications continue to flow through its network. What the company’s end game is, though, no one really knows. However, putting so much information in the hands of a commercial company makes me a little bit nervous.