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The Non-Techie’s Guide To Facebook’s $19 Billion Purchase Of WhatsApp

By / 02.20.14

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As you all have probably heard, Facebook forked over a truly offensive amount of money ($19 billion) for WhatsApp, a messaging app. Basically, they just bought an IM service. Here’s what you need to know about the purchase.

To start with, what the hell is WhatsApp?

Remember AIM? It’s that, but for smartphones.

That’s it?!

That’s it.

Why the hell is that worth $19 billion?

It isn’t. Cash-wise, it’s worth about $4 billion, which is what Facebook paid, plus $15 billion of Facebook stock, which will basically be toilet paper in a few year’s time. To understand why Facebook paid that, you need to understand the “value” of apps and how Facebook thinks.

I notice “value” is in quotes.

There’s a reason. WhatsApp was not making money, had no plan to make money, and will, after Facebook eats, still not make any money.

The best analogy here is broadcast television. It’s easy to forget that TV shows, in and of themselves, do not necessary make the network money, but the fact that we watch them makes broadcast networks an enormous amount of money. The audience is the product.

This is more or less what happened with WhatsApp. Even if every single one of its customers shelled out for the service, which they don’t, it would still only be making $450 million a year. But it has 450 million customers, in areas Facebook would like to have more market share in. Hence the sale.

Users are that valuable?

To Facebook? You bet. And by that standard, it’s not a bad idea to add half again your userbase while taking out a competitor to Facebook Messenger in one fell stroke. But it’s also managed to screw over Facebook.

How?

As we’ve noted before, Facebook’s strategy for dealing with competitors has used one of two methods: Buy them out or lock them out. The former is why Instagram is Facebook with more pictures, and the latter is why your Vines won’t post to Facebook. But the WhatsApp buyout has killed that strategy dead.

When the next competitor to Facebook in some way comes along, whether it’s an app that’s beating out part of their ecosystem or a social network that’s potentially a threat, in the back of their minds, they’re going to remember WhatsApp got $19 freaking billion out of Facebook, and they’re going to want more. And if Facebook won’t, or more likely can’t, pay that out, and locking them out isn’t an option, then Facebook is going to have to actually compete.

That’s not going to go well for Facebook. They’ve rarely had to compete like most businesses do; social media is so young as an industry that often robust improvements are all the competing you really need. And it is true that there’s not really a competitor on the horizon, yet. But it seems likely that sooner or later, there will be, and then Facebook will need a new strategy.

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TOPICS#Facebook
TAGSBAD IDEASbuyoutsSocial MediaWHATSAPP

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