Trying to Make Sense of Facebook's Massive Bet on WhatsApp

Facebook is concerned about losing mind share and apparently not concerned about owning complementary properties that may not ever be fully integrated or generate revenue for the foreseeable future. So why is this a good deal for Facebook?

Facebook achieved another series of firsts this week in one gargantuan swoop, though it came at a staggering, virtually unparalleled price of $19 billion.

The WhatsApp acquisition reinforces Facebook's lead as the world's largest social network and also adds to its growing array of platforms that command user attention and engagement on mobile platforms.

What's driving this deal and leaving competitors dismayed is Facebook's continued determination to acquire and innovate in the face of disruption. It also shows that Facebook is concerned about losing mind share and increasingly comfortable with owning and operating complementary properties that may not have to be fully integrated after all.

WhatsApp More Engaging Than Facebook

"It's the only app we've ever seen with higher engagement than Facebook itself," CEO Mark Zuckerberg said during a call with analysts. "We think WhatsApp is on a clear path to have a billion people using their product."

[Related: How WhatsApp is Different Than Other Messaging Apps]

Giving up roughly 10 percent of its market value for WhatsApp's 450 million monthly active users couldn't have been easy to swallow for Facebook, but Zuckerberg says the deal came together in just nine days. Many analysts are wondering how much of that price was purely by a defensive move to keep the fast-growing mobile messaging market away from its competitors. Facebook's own Messenger mobile app isn't exactly setting the world on fire so something had to give.

Zuckerberg: Money Doesn't Matter, We Won't Interfere

Unlike the flexibility Facebook acquired in Instagram's executive team, WhatsApp's founders are diametrically opposed to advertising and have been unafraid to say so since day one. Making the kind of money that would typically justify such a high price doesn't even appear to be on the radar, and Facebook is fine with that. "We're not really concerned about monetization today, we're focused on growth," said WhatsApp CEO and co-founder Jan Koum, who will join Facebook's board once the deal closes.

"Our explicit strategy is for the next several years to focus on growing and connecting everyone in the world. We believe that once we get to being a service that has a billion, two billion, maybe even three billion one day, that there are many clear ways that we can monetize," Zuckerberg says.

"One of the big reasons why it makes sense for WhatsApp to join us is that, as an independent company, they wouldn't have been able to purely focus on growth," Zuckerberg adds. "I don't think that ads are the right way of monetizing messaging services, and I know Jan shares this philosophy."

[Related: With WhatsApp Buy, Facebook Wants to Become the Only Network You Need]

The price Facebook paid for each WhatsApp user scratches out to $42.22, according to data compiled by SNL Kagan senior analyst John Fletcher. Over the past three years only Yahoo's $50 million acquisition of Qwiki comes out higher at $55.56 for each of that company's 900,000 users. While those prices per user are impressive, Facebook's current market cap carries a value of about $143 for each of its 1.23 billion users.

With just 55 employees, the value of the WhatsApp deal per employee reaches a sky-high $345.4 million. When Facebook acquired Instagram for $1 billion in April 2012, giving up roughly 1 percent of its business at the time, it paid $33.33 per user or $76.9 million for each of Instagram's 13 employees.

[Related: 5 Cloud Computing Trends That Will Be Big in 2013]

The Photos Are Flying on WhatsApp

More than 70 percent, or 320 million, of WhatsApp users are using the service every day, according to the company's latest numbers. Even more remarkable though is the 500 million photos that WhatsApp processes every day. Facebook and Instagram combined process an average of 405 million photos a day, which is just barely ahead of the 400 million snaps that Snapchat generates per day.

[Related: With Whatsapp, Facebook Aims for Immediacy]

Photo-sharing has always been a core feature of Facebook. This move along with its Instagram acquisition and a more recent reportedly spurned offer of $3 billion for Snapchat illustrates how important photos continue to be for any social outlet of global magnitude.

With photos, in particular, Facebook is embracing a relatively new strategy that involves multiple apps running on disjointed platforms. Others like Google+ are still focused on capturing and storing users' photos in one massive hub. The approaches could not be further apart, and the latest numbers leave little doubt that photo-sharing using mobile devices is dominating the market today.

The sheer scale of growth in numbers at WhatsApp illustrate how important the shift to mobile is and how quickly it is occurring, Andreesen Horowitz partner Benedict Evans notes in a blog post. "WhatsApp is probably now sending more messages than the entire global SMS system," he writes.

"Mobile social apps are not really about free SMS. Mobile discovery and acquisition is a mess -- it's in a pre-pagerank phase where we lack the right tools and paths to find and discover content and services efficiently. Social apps may well be a major part of this," he adds. "These apps have the opportunity to be a third channel in parallel to Google and Facebook."

Matt Kapko covers social media for CIO.com. Follow Matt on Twitter @mattkapko. Email him at mkapko@cio.com Follow everything from CIO.com on Twitter @CIOonline and on Facebook.

Read more about social media in CIO's Social Media Drilldown.

This story, "Trying to Make Sense of Facebook's Massive Bet on WhatsApp" was originally published by CIO.

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