Facebook just spent $16 billion to acquire WhatsApp, spending $4 billion in cash and $12 billion in Facebook stock (it'll also kick in another $3 billion of stock over the next four years for good measure). It's by far Facebook's biggest acquisition — 16 times larger than what the social network paid for Instagram.
If you live in North America, you may not have much experience with WhatsApp. It's fundamentally a text-messaging replacement app that lets you send messages to any of your contacts, even if you don't know their phone number. Similar to BlackBerry Messenger and iMessage, the service lets users bypass their carrier's SMS (short message service, generally known as text messaging) and avoid any texting fees.
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WhatsApp is one among many similar services, but it's by far the most popular, with 450 million active users. Chinese competitor WeChat claims 270 million active users, and Japan's Line recently passed 300 million registered accounts (though active users are a subset of that). Viber, Kik, ChatON and others are all players, too.
Although WhatsApp has more general appeal than many of its alternatives, its popularity varies by region as well. It's huge in India, for example, where the app is even available on feature phones, such as the Nokia Asha line. Since those phones require extremely small or nonexistent data fees, it's easy to see why WhatsApp and its SMS-avoiding brethren have become so popular in markets where fewer people can afford expensive smartphones and the data plans to go with them.
WhatsApp is a free download, but the service will begin charging you after the first year of use. To keep using the app, you need to pony up $0.99 a year — for most, a pittance when compared to the carrier fees for a text-messaging plan.
Still, even if every single one of its active users becomes a paying customer, WhatsApp would generate just $450 million in total revenue. The service says it has no plans to introduce ads, and it so far has no other way to make money. So why was it worth $16 billion?
During a call to discuss the merger with investors, Mark Zuckerberg said that because WhatsApp is on track to have more than a billion users, it's a rare mass-market service that is "extremely valuable." Zuckerberg stated that the acquisition fuels Facebook's mission to make the world more open and connected.
He also got more specific: Zuckerberg said buying WhatsApp helps Facebook's Internet.org project — its mission to provide Internet access to the two-thirds of the world not yet connected. Since most of that growth is expected in the developing markets where WhatsApp is popular, WhatsApp appears to have been suddenly elevated to a key component of that strategy.
Zuckerberg also made clear that Facebook didn't acquire WhatsApp to replace Facebook Messenger. He said both services have different use cases — with Messenger acting more like email and WhatsApp more real-time — and will remain independent, each with support.
Like Instagram before it, Facebook's acquisition of WhatsApp doesn't add up if you just look at the numbers.
But Facebook paid $16 billion for it because it achieved what Facebook couldn't on its own: Significant mindshare and active use in parts of the world where the mobile market is poised to explode in the coming years.
Everyone with a stake in mobile — from phone manufacturers to chip makers — is targeting those markets, desperate to get a piece of the pie as customers in Asia, Africa and South America snap up smartphones. After today, it's practically guaranteed that almost all of those phones will be running an app owned by Facebook.
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