Zuckerberg bites the bullet with his name on it

Ian Scales
By Ian Scales

Feb 21, 2014

Facebook’s downloading of WhatsApp for $16 billion plus $3 billion in extras for the management is indeed a cunning plan and may be the most expensive bullet in history. It’s certainly a vast investment, even for Facebook, whose shareholders suffered a nervous twitch in the wake of the news and dropped the stock by 3 per cent or so. The price quickly recovered as it became clear that the world wasn’t going to implode on the news.

To recap, Facebook has shelled out $19 billion for a company that’s only been going since 2009 and that today still only employs 55 people, most of them software engineers. (see - Facebook buys WhatsApp for $16 billion).

Why? Because it looked like it had hit the network effect on steriods. According to the company, its growth has accelerated to the point where’s it’s now downloading 1 million new users per day. That meant that it was soon going to accelerate past half a billion users (it currently has 450 million) and, in a year or two, have more users than Facebook, perhaps. This is not allowed. Mr Zuckerberg bought the companny.

Not only was WhatsApp growing, it was doing it on the exact opposite business model from Facebook, and surprised everyone by going from nothing to a very big something in a very short space of time without publicity, without the usual hoopla, without ads.

It is simply a very slick and clever messaging network and the way it’s gone about growing makes it the social network equivalent of the uncarrier - the antisocial network perhaps? No ads, no privacy invasion, no a clutter and no obvious commercial intent. Marketing has been next to zero and users flocked to it through word of message.

My daughters said they loved it when I conducted some micro research on the phenomenon last year. They still use Facebook of course, just not so much. Facebook is where people go to amplify themselves and it’s still necessary to be on it, even if just to check up on who’s doing what and with whom. But when it came to constant ‘stay-in-touch’ communications WhatsApp was the weapon of choice. I notice it still is.

Avoiding the cloying commercialisation of Facebook and the “look at me I can type” narcisism of Twitter was very much the intention of WhatsApp’s two founders who seem, by all accounts, to regard themselves as older, wiser and more down-to-earth than most of the Californian digeratti. The whole no-nonsense approach of WhatsApp (and most importantly, the no ads rule) is all of a piece and, when you think about it, is pretty much a no-brainer. How might you compete with Facebook? Remove the thing that many people are bound to take issue with - the blatant commercialisation.

So here’s the first irony: in making it much easier for the world to communicate and share, (as Zuckerberg is apt to eulogise) Facebook made it easier for the world to type, “Have you heard about WhatsApp? Download it … it’s really cool.” And they did.

You see the problem. If WhatsApp kept on growing like that it could present a complete business model challenge to Facebook. Instead of monetising user data and flinging ads about, WhatsApp has simply started charging a small fee: 99 cents after a year when you have to download a new app to keep it working. Simple, no fuss.

And then, what if it kept on growing and added a bit of Facebook-style social network facility on the side, then adding voice and video. What a nightmare for Zuckerberg. So he bites the bullet and buys the bullet with his name on it.

But then here’s another problem and the second irony. If WhatsApp exists because it has no ads and has just been bought by Facebook for $19 billion, can Zuckerberg make enough from it to justify the price tag? It would be madness to introduce straight advertising, Facebook-style, as WhatsApps adherents would fall away and join another ‘hot’ messaging service. And in any case this option appears to have been ruled out with WhatsApp supposedly continuing just as it is.

Most likely Zuckerberg has to tiptoe around the WhatsApp model, taking customer data and using the telephone numbers (WhatsApp has the telephone numbers that Facebook doesn’t) to refine the Facebook data, without the WhatsApp users noticing anything.

Zuckerberg has a real task on his hands.

But spare a thought too for the messaging enthusiasts at Mobile World Congress where Zuckerberg is due to speak on Monday, no doubt now to explain the purchase and why no telco need be hurt in the aftermath. Clearly, in valuing WhatsApp at $19 billion, Zuckerberg sees very little likelihood for success for RCS Joyn or telco messaging generally.

And a broader question remains. If Facebook’s floatation is evidence of an investment bubble, how much more has that bubble just been inflated? It now looks like a bubble on a bubble, and things like that always go ‘pop’ eventually. Come on people: $19 billion, for 55 engineers and some bits of software?

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