When Facebook announced its plans to buy WhatsApp for a total sum of $19 billion, there was a mixed reaction. From some corners, there was bafflement as to why the social network was spending more than twice its own annual revenue buying the messaging application, which currently brings in little of its own.
But the deal may make more sense when examined in the context of Facebook’s overall strategy. Buying WhatsApp – and more importantly, its user base – will strengthen Facebook’s position in the mobile sector. WhatsApp’s user base now stands at 450 million users, and is growing by about one million every day.
At the last count, more than 18 billion messages were being sent every day. Zuckerberg is betting that the company will continue this trajectory, putting it on track for one billion users before long.
It’s that magic figure that has Zuckerberg and Facebook excited, with the tech chief executive describing the services that reach that milestone as “all incredibly valuable”.
It’s not the first attempt that Facebook has made to get further into the mobile sector. Aside from its own Facebook Messenger service, the company has also been hunting for a decent acquisition in this area. Facebook last year tried to buy Snapchat for $3 billion, but the advance was rebuffed publicly by its founder.
What the purchase of WhatsApp gives Facebook is easy access to a loyal customer base; the messaging service says about 70 per cent of its users are active each day. That’s more than Facebook’s own user base, at 62 per cent.
WhatsApp also has a stronger foothold than Facebook Messenger in countries outside the US. It's popular among European users, in Africa, Australia and Latin America. Plus it has that all-important younger audience.
Looking at revenue, things get a bit less clear. WhatsApp currently has an ad-free model that it says will continue – for now, at least – and Facebook seems to be on board with that.
Where WhatsApp makes money is through offering a year-long trial of the service, with a subscription fee of about 99 US cents per year kicking in after that. However, that subscription fee was only introduced last year. Prior to that, users on iOS were charged a once-off fee, and WhatsApp has so far not attempted to impose further charges on those customers.
All this may not soothe the nerves of those predicting a bubble in the tech industry. But another aspect to note is that the bulk of the deal is in Facebook stock, with only $4 billion being paid over in cash.
