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Messaging monopoly? Why Facebook is willing to pay $19 billion for WhatsApp

February 20, 2014 at 6:21 PM EST
In four years of existence, the messaging service WhatsApp has attracted hundreds of millions of users around the globe. Now Facebook is buying WhatsApp -- which charges long-term users just $1 per year -- for $19 billion, a value that eclipses most every startup deal in recent memory. Judy Woodruff talks to The Verge’s Ellis Hamburger for why Facebook believes the app is worth the price tag.


JUDY WOODRUFF: Now: Why is Facebook willing to pay $19 billion for a messaging application and service that’s just 4 years old and has only 55 employees? Facebook’s purchase of WhatsApp eclipses just about any other deal made for a startup in recent years.

As an instant messaging service for mobile devices, it’s attracting an enormous number of users around the world at a rapid pace. People can send texts, photos and video on WhatsApp over their phones. There are now more than 50 billion messages sent that way each day. The first year of service is free to consumers. Afterwards, it charges just $1 a year, cheaper than text service in many countries, and there is no advertising.

In the past nine months, its use has doubled to 450 million monthly users, most of them outside the U.S.

Reporter Ellis Hamburger has been covering this for The Verge. It’s a technology-centered news Web site. And he joins me now.

Ellis Hamburger, welcome to the program.

First of all, tell us more about WhatsApp. What is it? How does it work?

ELLIS HAMBURGER, The Verge: WhatsApp is actually really simple.

It was built for a replacement for SMS to help save people money. And what you can do is, you can send text messages, photo messages, voice messages to your friends, one or more friends, and it’s private, and it works just on your phone. So, most importantly, though, it hooks into your phone book. So the second you start using it, you can talk to all your friends and save a ton of money on your texting bills.

JUDY WOODRUFF: And what does it bring to Facebook that Facebook doesn’t already have?

ELLIS HAMBURGER: I think it brings two things to Facebook.

One is just the fact that it’s one of Facebook’s biggest competitors. Facebook doesn’t exactly know what paths WhatsApp is going to go down, but with 450 million users — and that’s active users — that’s people that are using it every month — it’s right up there with Facebook in terms of the most-used apps in the world. And they’re afraid of it.

They don’t want people socializing on apps that aren’t theirs. And the second piece is that WhatsApp is incredibly dominant in lots of places and countries around the world where Facebook isn’t, like Spain, for example, where Facebook’s own messenger app is about 10 percent usage, and WhatsApp is, I think, higher than 85 percent.

So I think it’s about acquiring a lot of new users, but also they just want to acquire company that is really threatening them in the communication space.

JUDY WOODRUFF: So, Spain and you are saying many other countries?

ELLIS HAMBURGER: Yes, Switzerland is another one.

And it’s all about for them kind of controlling the way that you talk to your friends. And we’re a little blind to it in the United States, because Facebook’s own messenger app has been so popular and because text messaging plans are cheaper here than they are around the world. But so many places around the world, WhatsApp is the way that people talk to their friends and family, since nobody is talking on the phone anymore. They are just texting. And Facebook can’t let that opportunity pass.

JUDY WOODRUFF: And why ask it worth $19 billion, potentially? I looked it up today and was reminded that Comcast paid, I think, $17 billion or $18 billion for NBC Universal just a couple of years ago.

ELLIS HAMBURGER: It’s hard to quantify exactly how much it’s worth.

Facebook paid 10 percent of its market cap, 35 percent of the cash it has, on WhatsApp. And that is a fraction of the money Facebook has to spend. But I think that it’s not as much as it could have eventually meant for Facebook, had WhatsApp taken over the world, since the world is moving increasingly to mobile devices, a place that Facebook has struggled.

And so they’re very afraid of WhatsApp. So the price, I think, matters less than kind of securing its place. Now Facebook owns the two biggest ways that people talk to each other in the world, whether that’s sharing something with all your friends on Facebook or sharing personally with one or with a group of friends on WhatsApp.

So it’s kind of hard to put a price tag on it. But it’s something that’s so critical for Facebook that I think whatever the price would have been, I think they would have fell for it.

JUDY WOODRUFF: So spell out a little bit more, what is it that Facebook was afraid of here?

ELLIS HAMBURGER: I think they are afraid of people using other services to communicate with their friends.

Facebook is one of the original ways that people communicated with their friends online, whether it’s on Facebook chat or posting photos. And photos, especially, are a way that we all communicate, whether it’s on Facebook or Instagram.

But the crazy part is that people are sharing just as many photos privately as they are with all their friends. So that’s a place, that’s a domain that Facebook hasn’t even begun to get in yet, the sharing with just a few people. They tried it a little bit with the new product called Instagram Direct, but it hasn’t exactly caught on.

So, in other words, Facebook owns the space that’s connecting with all your friends, let’s say, the 1,000 friends you have accumulated on the site. But it really didn’t have much of a big player in the space for private sharing. So that’s really what is trying to own with its acquisition of WhatsApp.

JUDY WOODRUFF: So does this in effect give Facebook a monopoly on messaging around the world? Or what are we missing here?

ELLIS HAMBURGER: I think it does. I think it absolutely does.

When you look at the charts, there are a few places around the world — like, in South Korea, an app called KakaoTalk is overwhelmingly popular with I think 89 percent of the market share there. And in Japan, there is an app called LINE that everyone uses.

So in neither of those places, people are using WhatsApp or Facebook Messenger very much. But pretty much every other country in the world with smartphones is overwhelmingly using WhatsApp. So you could call it a monopoly. I think when you look at the way that people are connecting on their phones over the next few years, it’s very likely with either Facebook or WhatsApp.

JUDY WOODRUFF: Well, I did read some speculation today that maybe this was overpriced. How will we know when, if this is too much money to have paid for this — this messaging service?

ELLIS HAMBURGER: I think it’s tough to tell.

But with as much cash on hand as Facebook has, it’s going to be willing to pay the price. Google was also throwing some chips in the game trying to acquire WhatsApp, because everyone seems to agree that this is just about the most important app company in the world.

Mark Zuckerberg said himself that WhatsApp is the only app in the world where engagement is higher than Facebook. So it’s hard to put a price tag on that. But when you look at the size of Facebook, the $100 billion or so it’s worth, really, WhatsApp, you know, in some ways could be considered a bargain, even though they have hardly monetized yet.

I think they had just $20 million in revenue. But with the kind of incredible engagement they had, with people sharing hundreds of millions of photos, and, like you were saying, 50 billion messages, there is so much room to monetize, that the opportunity is pretty incredible.

JUDY WOODRUFF: So do you see more of WhatsApp coming into the United States, and do you think Facebook will try to change it, change WhatsApp?

ELLIS HAMBURGER: To answer your second question first, in a lot of situations, the companies that acquire another smaller company, they try to exert some effect on it.

But I don’t think Facebook wants to do that. They learned when they acquired Instagram that, by leaving this community alone and not messing with the formula that helped this community become so successful, which some people would argue is because these services aren’t like Facebook, they don’t want to mess with it.

Facebook CEO Mark Zuckerberg and WhatsApp CEO Jan Koum also both essentially promised that Facebook wasn’t going to put ads inside of WhatsApp. Like I was saying, I think it is more about owning one of their biggest competitors than trying to impose their ad support on Facebook.

JUDY WOODRUFF: And just quickly, do you think it’s coming into the U.S.?

ELLIS HAMBURGER: That’s a good question.

And I don’t think it is. I think that the U.S. market for messaging apps is really fragmented. And people use the app their friends are on. And everywhere around the world, that’s been WhatsApp. But, here, it might be Kik Messenger. It might be Facebook messenger; iPhones are incredibly popular in the United States, and iPhones can text each other for free with iMessage.

So, there is not an overwhelming reason to use WhatsApp. Like I was saying, the main reason a lot of people chose it around the world is to save money on texting, where, in the United States, text are cheaper.

JUDY WOODRUFF: Ellis Hamburger, thank you very much.


JUDY WOODRUFF: And, by the way, Facebook turned the ripe age of 10 this month. So we looked back at some of the company’s hits and misses, from liking to poking. You can vote for your favorite on our web site.