There has been endless high-quality discussion about why Facebook was willing to pay more than what half of the S&P 500 companies are worth for WhatsApp. My biased distillation of the consensus is, basically, Facebook wanted to keep WhatsApp out of the clutches of Google, and the sale was in stock at a time when Facebook’s share price is at an all-time high, so Facebook didn’t have much to lose.
Or you might choose to believe Facebook’s stated reason, which is that WhatsApp could go to a billion users and that, with the powers of Facebook and WhatsApp combined, WhatsBook could reach three billion people, at which point making money is something that, according to Facebook CEO Mark Zuckerberg himself, can’t help but happen.
A number of commentators have argued that, once you run the numbers, this deal is, frankly, crazy. Albert Wenger, a partner at Union Square Ventures, said that Facebook “massively overpaid” for WhatsApp, mostly because there is no “moat” around messaging apps. Whereas Facebook owns your identity, the only thing you need to sign into a new messaging service is a phone number and an address book—something I experienced recently when I started using every chat app I could get my hands on, because each of about a half dozen friends preferred one over the other. Setup of each took about the same amount of time—60 seconds.
Ex-journalist Hamish McKenzie (he’s now at Tesla) argued that WhatsApp’s real problem is that even the combination of WhatsApp and Facebook doesn’t resemble—and can’t compete with—other more advanced chat apps from Asia, like WeChat, which has more than 236 million users to WhatsApp’s 450 million, and Line, which has over 300 million, or even Viber or Kik.
What’s missing from WhatsApp (and Facebook)
Apps like WeChat, Line, and Kik are all ecosystems unto themselves. They have games that double as means of communication. They let people do everything from send money, buy goods and top off wealth management products to book taxis and reservations at restaurants.
Currently, Facebook and WhatsApp don’t do any of these things. Facebook has failed before at implementing payments. Facebook also killed off any ecosystem of games or apps it might have nurtured by revoking developers’ access to its members, in a quest to keep them from spamming everyone’s news feed. Some are already arguing that WhatsApp will be Facebook’s way to get into payments.
The point is that Facebook finds itself struggling to match not only mobile-first social networks like Instagram (which it wisely purchased for the now paltry-seeming sum of $1 billion) and SnapChat (which it tried and failed to acquire) but competitors from Asia that were incubated in markets very different from the ones in the West. (Arguably, the reason WeChat does so much is that in China, where many services born in the US are blocked, there was a need for a domestic equivalents to countless startups people in the Americas and Europe take for granted.)
While Zuckerberg has said that WhatsApp will remain an independent app, and his approach to Instagram seems relatively hands-off, he also has a history of changing direction when it suits the needs of Facebook.
What Facebook will have to turn into
Even if macro trends don’t take the wind out of Facebook’s valuation in the next year, it’s hard to imagine—barring something radical from Apple—that $19 billion won’t be the high water mark for Silicon Valley acquisitions for some time. Let’s assume that this acquisition wasn’t pure hubris. Facebook must have a plan for WhatsApp.
It’s not unreasonable to assume that WhatsApp will become the vehicle for many projects Facebook has tried and failed to launch in the last several years—chief among them payments. Facebook needs access to our credit cards, if only to diversify its revenue streams away from the advertising dollars that it explicitly won’t be extracting from WhatsApp (or even its own) users.
Facebook is also going to have to integrate user identities with WhatsApp, so as to start to build a moat around the users who are on WhatsApp but who could jump to a competing messaging service on a whim.
This means that, sooner rather than later, Facebook will become a hybrid—WhatsBook or FaceApp or however the chattering classes will malign it right up until its ad sales machine blows away Wall Street’s expectations. It also means, for Facebook’s sake, it’s going to have to come to resemble its competitors, not just by bolting a messaging service onto Facebook, but by truly integrating the two, and then coming up with new ways for other developers to play on its service, creating even more value.
The challenge is, in some ways Facebook is boxed in by its own past failures in turning Facebook into a utility for anything other than social validation. In the western world, who is going to pay for apps inside Facebook’s app when they can already get them directly from Google or Apple? Is anyone really going to give Facebook their credit card to purchase virtual goods from the (massively popular) marketplace that is boosting revenues at Line? Facebook missed its chance to be, like Google or Apple, one of the chokepoints of the internet.
So whatever Facebook creates, it’s not going to be its own beast. There are probably still huge opportunities in banking and retail, enabled by Facebook’s universally-accepted login and authentication system, which is one of the two kinds of leverage Facebook still has. The other is, of course, Facebook’s enormous power to drive traffic to publishers and brands. Perhaps WhatsBook will integrate with Facebook’s Paper app and become the internet’s true homepage. Just eating all the ad revenue currently locked up in AOL and Yahoo could keep Facebook’s share price on a tear for a while yet.
It’s the same theme we’ve seen over and over again with Facebook