Why did Facebook Acquire WhatsApp?

POSTED BY Analyst Team
Facebook has announced that it had snapped up mobile IM platform WhatsApp in a deal worth $19 billion ($4 billion in cash, $12 billion in Facebook shares plus an additional $3 billion in stock at a later date). This is by far Facebook’s largest acquisition to date, and the repercussions throughout the mobile messaging industry will be huge. In a novel turn of events, WhatsApp Co-Founder Jan Koum will sit on Facebook’s Board of Directors, only 7 years after being rejected for a job at the company. WhatsApp itself has 450 million monthly active users, and claims to be adding 1 million a day. It charges a $0.99 subscription fee to users after a year’s free trial (although it is possible to continue using the service without paying), which brings in an estimated $100 million annual revenue for the company – meaning approximately 22% of WhatsApp’s users pay for the service. So why exactly did Facebook want to acquire this company? Not for its revenue obviously – WhatsApp will add a modest 3.9% to Facebook’s annual earnings. IM apps in general aren’t known for their revenue generating potential, as I discuss in Juniper’s recent Mobile Messaging Markets report. Furthermore, Facebook has its own – albeit less popular – IM app, Facebook Messenger. And that is indeed the point: Facebook purchased WhatsApp to break into new markets where Facebook Messenger isn’t popular. WhatsApp has penetrated markets such as India, Brazil and Mexico, whereas Facebook Messenger sees the majority of its traffic come from the US and Canada. In addition to this, acquiring WhatsApp goes some way to address Facebook’s ‘teen problem’, where it is seeing decreased usage among the younger demographic. Facebook tried to counteract this by acquiring SnapChat for $3 billion, but the offer was rejected late last year. Furthermore, Google reportedly offered WhatsApp $1 billion last year, as its Hangouts IM app struggles to see widespread adoption. Facebook naturally wanted to keep one of its biggest competitors away from WhatsApp, as well as to keep up with the likes of Apple, which operates iMessage, Microsoft/Skype and more recently Rakuten/Viber. How long before a big player such as Amazon makes a bid to enter this space? As the market continues to consolidate, players such as Kik Messenger and Tango seem likely targets for acquisitions. At first glance, WhatsApp and Facebook seem to have incompatible strategies – WhatsApp is staunchly opposed to advertising, yet Facebook is seeing huge growth in its advertising revenues. However, WhatsApp have assured users that there will be no ads shown in the app, and Mark Zuckerberg himself has said that he doesn’t believe ads are the right way to monetise messaging, and instead wants to see WhatsApp gain 1 billion users before he considers monetising it. At the company’s current rate of user growth, I should therefore be able to update you on their monetisation strategy in August 2015…