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What's up with Facebook's WhatsApp deal?

February 26, 2014Written by Tom Ryan

Why did Facebook pay $19 billion for WhatsApp?

With a mantra of "no ads, no games, no gimmicks" and strict rules guarding customer data used in its messaging services, many guesses have arrived in the last few days about how WhatsApp will be monetized in the future.

WhatsApp currently works on a subscription model, charging $1.00 per year with the first year free. Like its Instagram purchase, WhatsApp will operate independently of Facebook, focusing near-term on building its user base without an immediate plan for making money.

Here are a few core theories on what drove the acquisition:

Mobile domination: With Google also said to be interested and teen usage slowing on Facebook, the acquisition was seen by many as a defense measure. Facebook gains the leader position in privacy-messaging services, one driven by communications among smaller, closer groups than the mass approach of Facebook or Twitter. Its users are younger and more mobile-engaged than Facebook's. If such tighter-communication networks take over, Facebook protects itself. If a varied social experience becomes the future, its mobile portfolio includes Facebook, WhatsApp and Instagram.

Critical mass: The premium paid partly reflects WhatsApp's 450 million member base, of which 70 percent are active every day. One million new users sign up every day. John Delaney, an analyst at IDC in London, told Bloomberg News, "Once you pass a certain threshold of users, it acquires a momentum of its own."

Photos: On Pando Daily, Sarah Lacy argued that dominating mobile photos was a core driver. WhatsApp processes 500 million photos a day, well above the 55 million Instagram processes daily and Facebook's 350 million.

Subscription-based model: Some believe the era of free to cheap apps will soon be over. With its dominant position and soon-to-be added services, such as voice messaging, the subscription price could be leveraged exponentially higher.

Rich data: Besides the mobile phone number and address book, WhatsApp doesn't use any customer data and doesn't store the messages sent over its platform. But if leveraged, the existing data could be particularly useful for targeted ads on Facebook and Instagram, since it's based on personal communications between confidants rather than general statements on a Facebook timeline.

Intelligent advertising: Instagram introduced ads last year and many believe WhatsApp will as well one day. Writing for the Guardian, Benjamin Robbins, a co-founder of mobile-consultancy, Palador, said it's "not realistic" to expect to make money without ads — and personal information and usage patterns will lead to more "intelligent" ads. He wrote, "What we need isn't more high ideals or more blatant boring broadcasted advertising, but a healthy mix that demands a more intelligent blending of the two."

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