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Why is Facebook Paying $19 Billion for WhatsApp?

Why is Facebook Paying $19 Billion for WhatsApp?
Why is Facebook Paying $19 Billion for WhatsApp?

The second question seems to have been answered by both Facebook and WhatsApp. Since Facebook gets its revenue from selling advertising while WhatsApp eschews it, one plausible route would be the introduction of advertising into WhatsApp. But both companies have strongly suggested that this will not happen. Facebook announced that its acquisition policy is to allow the companies to 'set their own direction and focus on growth.' "WhatsApp’s brand will be maintained; its headquarters will remain in Mountain View, CA; Jan Koum will join Facebook’s Board of Directors; and WhatsApp’s core messaging product and Facebook’s existing Messenger app will continue to operate as standalone applications."

For its part, WhatsApp has always stressed that it will not accept advertising. Last June Jan Koum blogged, "Advertising isn’t just the disruption of aesthetics, the insults to your intelligence and the interruption of your train of thought... Remember, when advertising is involved you the user [Koum's emphasis] are the product... We are simply not interested in any of it."

Such strong views would require either a major and sudden volte-face, or very strong agreement with Facebook that it will not impose advertising.

There must therefore be other reasons for Facebook to pay so much. This, suggests Wired, is Zuckerberg "playing the long game." It suggests that regardless of what each company says today, "WhatsApp will eventually make its money through what are essentially ads — if it makes any money at all." But that doesn't mean that the ads will appear on WhatsApp itself.

A clear intent of Facebook is to take on Google by owning the mobile space. This is a difficult prospect since Google's Android operating system is pre-installed on 80% of the world's mobile handsets. To make it harder, Facebook is largely a closed area – it can only interact with Facebook users, while Google interacts with anyone and everyone that uses the internet. Even more worrying for Facebook are the clear indications that it is losing the 'buzz' factor with the younger market – who are switching to more dynamic and apparently privacy-conscious messaging apps like WhatsApp.

Whether WhatsApp really is more privacy-conscious is a separate question. Last year the Dutch data protection authority, working with the Canadian privacy commissioner, concluded, "The investigation revealed that WhatsApp was violating certain internationally accepted privacy principles, mainly in relation to the retention, safeguard, and disclosure of personal data." As a partner with Facebook, which has more obvious privacy concerns of its own, WhatsApp will undoubtedly face even greater inspection in the future.

The real reasons for the purchase of WhatsApp are probably twofold: to maintain involvement with the younger market, and to increase its reach outside of Facebook itself. In this case the long game being played by Zuckerberg is also a numbers game.

Infosecurity spoke to Jody Brazil, president and CTO at Firemon about the recent high value tech acquisitions. On the purchase of Mandiant by FireEye for $1 billion, he pointed out that the 'bottom line' is augmented by the top line: growth – and both FireEye and Mandiant have been growing rapidly. This same argument also applies to WhatsApp, which has recently been taking on 1 million new users every day. This alone increases the value of WhatsApp. 

In social media, Brazil told Infosecurity, there are two factors to value: "the size of the user base and the churn of the user base. Facebook's problem is if the people who use it become tired of using it and start dropping off, then their advertisers will start paying less. So what Facebook is doing is buying growth, but growth in the user base – especially the young user demographic that is showing signs of switching from Facebook to messaging apps – rather than growth in revenue. It is the user base will dictate future revenue."

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