Facebook's WhatsApp buy no bargain
Facebook's purchase of WhatsApp for AU$21 billion may net it new users, but it's questionable whether messaging app services can provide solid long-term value, says expert.PT2M22S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-333jm 620 349 February 20, 2014
WhatsApp, the mobile messaging app acquired over a plate of chocolate strawberries for a cool $US19 billion ($21 billion) on Thursday, was founded by two former Yahoo engineers, one once rejected by Facebook.
As the story goes, WhatsApp co-founder Jan Koum crashed a Valentine's Day dinner that Facebook founder Mark Zuckerberg planned for his wife Priscilla Chan, eager to discuss a tie-up between their two companies.
WhatsApp founders Brian Acton, left, and Jan Koum at the company headquarters in Mountain View, California. Photo: New York Times
The negotiations rumbled on as the pair snacked on chocolate-covered strawberries intended for Ms Chan and culminated in Facebook buying WhatsApp for a staggering $21 billion.
The deal, confirmed Thursday, makes instant billionaires of Mr Koum and co-founder Brian Acton.
Not a bad return for a company the pair, both former Yahoo engineers, formed less than five years ago and for Mr Acton who, in 2009, was turned down for a job at Facebook.
Mark Zuckerberg, founder and chief executive officer of Facebook. Photo: Bloomberg
He tweeted not long after that rejection: "Facebook turned me down. It was a great opportunity to connect with some fantastic people. Looking forward to life's next adventure."
WhatsApp is just the latest technology start-up to be offered an insane amount of money as part of an acquisition which is six times what Google paid for Nest in January, and 19 times what Facebook paid for Instagram two years ago.
It also comes shortly after Facebook was said to have offered photo disappearing app Snapchat $US3 billion, and Google was said to have also offered $US4 billion. Both offers were turned down.
Mark Zuckerberg and his wife Priscilla Chan. Photo: Reuters
It's so much money that people found themselves reaching beyond the business realm for context. It's equivalent to almost four-times Australia's current annual overseas aid budget. It's also the purchase price of the total annual lending of the World Bank.
The start-up, which has an active subscriber base of 450 million users per month who send and receive more than 50 billion messages per day, employs about 50 people in Mountain View, California.
The deal includes $US12 billion in Facebook stock, $US4 billion in cash and $US3 billion in restricted shares. Most of the money is likely to go to Acton and Koum, while the rest of it will filter down to employees with stock options and investor Sequoia Capital, which was reported to have invested $US8 million in the company in early 2011 for an unknown amount of equity. In a blog post, the investment firm praised the WhatsApp founders.
A screenshot of WhatsApp Messenger.
“For the past three years, it's been our privilege to work shoulder-to-shoulder with Jan and Brian as their close business partner and investor,” Jim Goetz, a partner at Sequoia Capital, wrote on Thursday.
“It's been a remarkable journey, and we could not be happier for these talented underdogs whose unshakeable beliefs and maverick natures epitomise the spirit of Silicon Valley.”
Koum said in a statement that he was "excited and honoured to partner with Mark and Facebook" as WhatsApp continued to bring its product to more people around the world.
Hinting at perhaps why Facebook bought WhatsApp, Zuckerberg said in a conference call that it was "the only widely used app we've ever seen that has a higher rate of engagement than Facebook itself".
Koum, who arrived in the US as an immigrant from the Ukraine at 16, grew up with a family who were on welfare and collected food stamps, he said in a rare public appearance at the DLD Conference in January.
One of the things that shaped WhatsApp in the long term was the exuberant fees telcos charged for text messages, Koum said – something he faced when talking with family overseas when he arrived in the US in 1992.
"There was no technology [back then like] we have today and I actually remember trying to keep in touch with my friends and family was not that easy," Koum said at the DLD conference.
"You had all these long distance telephone companies ... and you had to sign up for a plan and just communicating and keeping in touch in 1992 was so difficult and so painful.
"And when you're an immigrant – and you don't really have a lot of financial resources to do it – it gets even more challenging."
WhatsApp, which doesn't have advertising and instead makes money from a nominal $1 annual fee, allows user to chat and send pictures and videos back and forth with friends over the internet, like Apple's iMessage, Microsoft's Skype, BBM, or Facebook Messenger. It's particularly useful as a way to chat with friends and family overseas without running up big charges.
Colin Fabig, the founder of Australian-based social network spring.me, said the acquisition made sense for Facebook as users began to desert it for messaging apps like Snapchat, WhatApp and similar services.
"I think WhatsApp has got a fairly good hold in the market and Facebook's way to grow is to get new apps," Fabig said. "What they can't do is keep on having their own apps or adding things to their platform.
"People don't really jump across apps once they've logged on to one."
The Mountain View office WhatsApp is run out of is so nondescript that Wired magazine's UK editor David Rowan recently remarked that "nobody in [Silicon] Valley seems to know where WhatsApp" is based.
Rowan published on Thursday a snippet of a feature he wrote after spending three days at WhatsApp in January, the full version of which is due to appear in March. In it he details how WhatsApp was initially formed on Koum's birthday in February 2009 as a company that would make a phone "status" app that would simply indicate to those wanting to call someone whether it was a convenient time for the receiver to take the call.
The app later evolved into what it has become today – a real-time, cross-platform instant messaging app for smartphones.
Koum's co-founder Acton, a father of one and computer-science graduate from Stanford who grew up in Florida, was employee number 44 at Yahoo, where he worked on display advertising, shopping and travel, then keyword advertising. He joined WhatsApp towards the end of 2009 when it evolved to become the real-time messaging app it is today and, according to Wired, kept in touch with Koum by playing ultimate frisbee with him.
Koum said recently that the recent growth WhatsApp has experienced (it's adding about 25 million users per month) was "mind boggling".
"We're so overwhelmed by our growth," Koum said. "It's kind of mind boggling to think that we have over 400 million people [that] use our product regularly."
Curiously though, Koum said as recently as January that he wasn't looking to sell his company.
"We're trying to build a company that we can be proud of and not something that is built just to quickly bump and dump," he said.
"I think for us it's always been about building a company that is here to stay, that is here for the next 10, 20 and 50 years."
What changed Koum's mind is unknown, but the story of how he and Facebook's founder and chief executive Mark Zuckerberg began nutting out an agreement has come to light via news agency Bloomberg.
Zuckerberg first reached out to Koum in early 2012, when the two met for coffee at a German bakery in Los Altos, California, and ended up talking for more than two hours, a source with knowledge of the matter told Bloomberg. They have since met frequently, going to dinner and on hikes, said the source, who asked not to be named because the process isn't being discussed publicly.
Koum went to Zuckerberg's house in Palo Alto for dinner on February 9, and the conversation became more serious. The two talked about how they could work together more closely on Zuckerberg's Internet.org initiative for connecting the world on mobile devices, and the conversation evolved into acquisition talks in the next 10 days, with Zuckerberg suggesting Koum join Facebook's board.
On Valentine's Day, Koum came by Zuckerberg's house with chocolate-covered strawberries that the two shared as they hammered out pricing points, the source said.
Whether WhatsApp will now introduce advertising is likely to be one of the concerns its existing users will have. In June 2012, Kuom penned a blog post explaining "why we don't sell ads".
He said advertising disrupted aesthetics and insulted users' intelligence.
How this view will work with Facebook, which makes most, if not all of its money from advertising, remains to be seen.
Facebook said in a blog post that "you can still count on absolutely no ads interrupting your communication". Whether "non-disruptive" advertising will appear is another question.
This reporter is on Facebook: /bengrubb