There are times that companies acquire businesses to boost revenue. There are times they primarily look to bring on talent they otherwise can't find. But Facebook (FB) was in a third camp when it paid a total of $19 billion, in cash and stock, for messaging service WhatsApp.
The social networking giant is, by the nature of its business, on a giant relevancy treadmill. And even though the stock was down by as much as 5 percent when it announced the purchase after the market closed on Wednesday, Facebook CEO Mark Zuckerberg will continue with this deal and others. He isn't soldiering on to prove a point or indulge a weakness for spending vast sums of money. Zuckerberg will buy WhatsApp because when it comes to strategic reality, he may not have much of a choice.
That Facebook paid dearly to obtain WhatsApp is an understatement. The number is six times what it offered for SnapChat. It makes the $1 billion Facebook paid for Instagram look like loose change dropped on a whim.
- 1 -- the company is focused on building a user-paid service without the need for advertising. The cost is $1 per year after the first year, and that's a lot less than an expensive SMS messaging service through a telecommunications provider.
- 450 -- the number, in millions, of active WhatsApp users. That's more than Twitter (TWTR) in a lot less time.
- 0 -- how much the company has spent in marketing to reach its current size.
- 32 -- the total engineering crew that built an efficient system currently handling 50 billion messages a day. The plain-language phrase for that figure is serious technical talent.
Those numbers quickly add up for Facebook, which is in a dangerous industry, where other major social networks have come and gone. No matter how well-established a service seems, it can become passé in a moment. The one way around the problem -- the one way to ensure that a social networking company has a future that extends beyond tomorrow -- is to keep transitioning and continue to be relevant.
Social networking is all about connecting people in various ways. WhatsApp does that in a basic way. Users can send messages to each other and, by paying a little, cut one of the cords to telecom carriers and save a lot of money in the process.
The telecoms can try to undermine the effort, but success is unlikely. They can't offer their own version of an app unless they cooperate with all their competitors and assure that users can reach anyone they want, no matter the wireless system. And trying to slow the service, as Verizon (VZ) and other Internet service providers have done to Netflix (NFLX), also won't succeed because the amount of data in a message is so small that such a move would have undetectable effect.
By purchasing WhatsApp, Facebook locks in hundreds of millions of users in a rapidly emerging social sector. Furthermore, the fact that people pay for the service means Facebook starts to find a way out of the box it has locked itself into regarding revenue. Zuckerberg has repeatedly said Facebook will remain free. Someone has to pay, and that has meant advertisers. But there's a limit to how many ads Facebook can push to users. WhatsApp is a business laboratory that lets Zuckerberg see how a pay-for-premium-service model might work.
This won't be Facebook's last big acquisition. It needs to stay on top of social technology, and it will spend large amounts to do so. And given what it's already shown it will pay, the large amounts will continue.