Why Facebook just paid $19 billion for WhatsApp

Facebook just spent $4 billion in cash plus an extra $12 billion in stock to acquire the text-messaging replacement app “WhatsApp.” (It’ll add in an extra $3 billion of Facebook stock over the next four years to sweeten the deal.) 
 
By and far, this is the company’s largest acquisition to date, 16 times larger than what it paid for the photo-sharing service Instagram.

This begs the obvious question: What’s up with WhatsApp? What makes it so valuable?

If you’re unfamiliar with it, the service is similar to others already out there, such as BlackBerry Messenger and iMessage, which allow users to bypass their carrier’s short message service (SMS) charges and avoid texting fees. But what separates WhatsApp from the rest of the pack is its sheer popularity — the app has more than 450 million active users across the world, and they can all bypass their carrier’s SMS fees if they use the WhasApp service, regardless if its iPhone to Blackberry, Samsung, etc.

Comparable services in volume include Japan’s Line, which has 300 million users, and China’s WeChat, which has 270 million active users.

WhatsApp is free to download, but the service begins charging users after one year of use. To keep it, there’s a $0.99 per year fee, a nominal amount when compared to what carrier charge for their text-messaging plans.

Still though, even if every single user agreed to pay this fee, WhatsApp would generate only $450 million in total revenue. The company has already stated it does not plan on introducing advertisements to the service, so any chance of it making more money outside of audience growth and retainment seems unlikely. So, again — what makes it worth $16 billion?

During a conference call in which he answered questions regarding the deal, Facebook CEO Mark Zuckerburg said that because WhatsApp is on track to have more than a billion users worldwide, it’s a rare mass-market service that is “extremely valuable.” He also said that the acquisition helps fuel his company’s mission to make the world more open and connected.

Zuckerburg then expounded on that last point a bit, saying that the purchase of WhatsApp will help Facebook’s Internet.org project, the company’s mission to provide Internet access to the two-thirds of the world not yet connected, which also happen to be where WhatsApp is expected to see the most growth in the coming years. 

Zuckerburg made it a point that the acquisition of WhatsApp is not meant to replace Facebook messenger; rather, he sees the two as entirely different services, with Messenger acting more like e-mail and WhatsApp more like real time. They will remain independent of one another.

In the eyes of the Facebook higher-ups, the acquisition was necessary because WhatsApp was able to achieve something the social network has not yet been able to do — gather an enormous audience in parts of the world where the mobile market is poised to explode in the coming years, including countries in Asia, Africa, and South America.

With this purchase, when users in these countries purchase their first smartphone in the next year or two, one can all but guarantee that nearly all of their devices will be running an app owned by Facebook.

Source: mashable.com