THE BLOG

Why Has Facebook Spent $19billion on WhatsApp?

26/02/2014 17:36 GMT | Updated 28/04/2014 10:59 BST

With the famous $1billion Instagram acquisition from 2012, and Facebook's own $100billion IPO the same year, you'd think the Tech world would take WhatsApp's $19billion acquisition more matter-of-factly. On the contrary, according to most Tech think-pieces, the number is a little unsettling; even the stock market acted out on the news when Facebook's stock reportedly fell 2.64%. This is due to concern that Facebook is purchasing growth rather than striving to create growth from within.

What's also baffling to commenters is that Google was rumoured to have bid $1billion for WhatsApp last year. Apparently, it was imagined that the acquisition didn't go through because of WhatsApp's noteworthy policy of "no ads, no games, no gimmicks". Facebook's number has significantly topped Google's offer; however, WhatsApp continues to operate independently and maintain its "No Ads" policy. So the question on everyone's mind is why Facebook put forth such an outrageous number when the company can't even extract ROI through ad revenue from the newly acquired business?

Is this the a tech bubble in the making?

Before answering the multi-billion-dollar "why", it's important to reiterate what I've said in the recent article and quell the fears of a tech bubble burst - the looming apprehension that the tech boom is all smoke and mirrors is natural, but it's not fair to compare dotcom disasters of the last decade with what's happening today. First of all, panicking that history is bound to repeat itself is to assume the Tech world hasn't matured. Secondly, the new tech giants are noticeably doing things differently this time around: instead of shooting for the stars with unsustainable ideas, companies are now focusing on identifying or anticipating what the consumer truly needs.

What does WhatsApp offer Facebook without a revenue?

Looking closely at the WhatsApp acquisition, a few notable points come to mind about how the messaging app can be integrated into Facebook's strategy. WhatsApp has 400 million users, and its reportedly adding 1 million users every day. The numbers here are impressive but are not as crucial as the target market they represent: WhatsApp's users are younger and more active users. Facebook's current user-base is getting older - it's no longer an exciting prospect to be part of the social media website and the normality of it all means the younger audience takes Facebook for granted and is looking for something different. That's where apps like Snapchat, Instagram, and Whatsapp come into play.

Target market aside, let's consider why Facebook would need WhatsApp when it has its own instant messaging app, Facebook Messenger. When WhatsApp started off, it's intrinsic worth was based on its unique selling proposition - a free instant messaging service. It was that core message that enabled WhatApp to achieve the necessary networking effects to become a global leader. While Facebook Messenger is doing well as an IM platform, it's certainly not the global leader in chat services. According to Mark Zuckerberg, the Facebook messenger is "widely used for chatting" with Facebook friends while WhatsApp is for "communicating with all your contacts and small groups of people". Facebook's official stance is that both serve "such different and important uses", but let's face it: Facebook Messenger isn't really the global market leader outside America. So, while WhatsApp is set to operate independently alongside Facebook Messenger, it's a smart move to absorb the competition in the Facebook Inc. umbrella. As a footnote, though, it's worth mentioning here that tech giants have a certain notoriety for subsuming smaller brands despite making other promises.

Finally, there is the access to developing, untapped markets. According to Pete Pachal, WhatsApp is exceedingly popular in India, for instance. While the Facebook Messenger is popular with a higher income bracket and smartphone owners, WhatsApp has functionality on feature phone lines like the Nokia Ash and other phones that need minimal data fees. It's a cheaper alternative for the bottom of the pyramid compared with pricey SMS packages.

So despite concerns, Facebook has clearly recognized the need to branch out into other markets. As Facebook celebrates it's 10th birthday, it's time to give credit where credit is rightly due. Let's look at the brand as a matured tech company instead of reaching for the panic-button.