Social Media giant, Facebook, recently announced that it was buying the texting phone app WhatsApp for $19 billion. The deal is not only the largest acquisition ever made by Facebook, but is the largest acquisition in Silicon Valley history. The deal was for $16 billion in cash and an additional $3 billion in stock.
Wall Street, and other analysts are somewhat puzzled by the acquisition. Many feel that WhatApp was not worth the price and had no advertising base. The founders of WhatsApp are quite opposed to advertising and Facebook founder and CEO Mark Zuckerberg commented that he believes that advertising may not be a proper fit for his new acquisition.
WhatsApp claims 450 million users, with well over 300 million using the app everyday, and the app is free to use for the first year of service. After the initial trial period of one year, the cost for an additional year is only one dollar. The other challenge the social media app seems to have is that it does not accumulate and prioritize user information and data. User preferences and traffic patterns has always been vital to the targeting of online advertising.
Wall Street has not been that enamored of the deal and cannot see how the social media behemoth can turn a profit with it. WhatsApp, despite it large user base, is hardly the dominant SMS in the world as WeChat reigns in China and Line is the premier app for all of Japan. Both WeChat and Line generate revenue through various methods from selling stickers to charging a fee. Line reported revenues of $17 million during the first quarter of last year. The premier service in South Korea is known as Kakao and it makes money selling mobile games on its service.
One of WhatsApp’s founders, Brian Acton, has always been quite serious about keeping the technology free. He has a sign affixed on his desk that simply reads: No ads! No games! No gimmicks!. Jan Koum, the company’s other co-founder has been even more explicit with regard to advertising. He has publicly commented that advertising destroys thought, as well as, aesthetics and is, basically, an insult to someone’s intelligence.
Wall Street will continue to express concern but seems willing to let the deal ride for awhile. The analysts also frowned when Facebook bought Instagram for a cool billion but began to change their tune a bit when Instagram began introducing advertising to the site last year. Zuckerman continues to laud the tactic of aggressively signing up more customers. If WhatsApp can reel in one billion social media users, it would guarantee revenues of $1 billion a year at the current pricing structure. WhatsApp continues to ad users at a torrent pace as it picked up over fifty million users in the last two months alone. Even as Facebook continues to lose ground among teenagers, Zuckerman is wily enough to know the value of an SMS that can be used across many different platforms.