Facebook aquires WhatsApp for $19 billion

31-Aug-14

Afzal Usmani

Aditya Suiwal

Debanshu Mukherjee

Dheeraj Rai

Deekshant Singhania

Himanshu Runwal

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Contents

Introduction ............................................................................................................................................ 3

Life History- Jan Koum and Brian Acton ................................................................................................... 5

How WhatsApp Started ........................................................................................................................... 7

Early Challenges Faced ............................................................................................................................ 9

Tracking Growth Of WhatsApp ................................................................................................................ 9

Acquiring offers made by other companies ............................................................................................ 10

Facebook’s offer and negotiations ......................................................................................................... 11

Facebook’s perspective ......................................................................................................................... 19

Conclusion ............................................................................................................................................. 23

Reference .............................................................................................................................................. 24

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Introduction

Since its priciest acquisition of Instagram,

Facebook purchased the fast growing

mobile messaging startup WhatsApp for

$19 billion in cash and stock on 19th

February 2014, as Facebook looks to

increase its customer base especially

keeping younger population in mind.

WhatsApp will receive $12bn in Facebook shares $4bn in cash and an additional $3bn in

restricted shares that will be paid out to executives at a later date. It is widely believed that

Facebook with this move is strongly focusing on the mobile messaging platform and with 450

million customer base to work with it should be able to convince the investors of its strategy for

mobile platform. The massive acquisition - Facebook’s largest ever - comes as tech firms are

fighting to build their mobile businesses. WhatsApp is particularly big in Europe and Latin

America where its market penetration is thought to top 80% in countries including Brazil,

Germany, Portugal and Spain. It is reported that WhatsApp registers around 1 million new users

every day.

The successful bid comes after Google reportedly made a $1 billion offer for the company last

year. Facebook has been trying to break into mobile messaging platform for the past couple of

years. In 2013 Facebook made an unsuccessful $3bn bid for SnapChat, a service that sends

messages that erase themselves after a short period. The social media firm is making the move as

WeChat, owned by China’s Tencent, is rapidly building its service in the west. Facebook faltered

after its share sale in May 2012 as analysts worried the company was losing out as its users

moved to mobile. It has since recovered and has concentrating on building up its mobile

business. But the company has also warned that teenagers are cooling on its service.

Global smartphone shipments are on the rise and totaled roughly 968 million for 2013.

Smartphone salesjumped 36% in Q4 2013 and constituted roughly 57.6% of total mobile phone

sales as compared to 44% during the same period a year ago. Developing economies including

Latin America, the Middle East and Africa, Asia-Pacific and Eastern Europe saw their

smartphones sales surge by over 50% during the fourth quarter, contributing most to the global

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growth. IDC forecasts smartphone shipments to grow to 2.3 billion by 2017 and, as we saw in

the fourth quarter of 2013, much of this growth will come from emerging markets.

Emerging countries include over 85% of the world population, and contribute almost three

quarters of global GDP growth, according to Fidelity Investment Ltd. Unlike developed

countries where smartphone penetration is above 50%, it is below 25% in many developing

countries. While the majority of the population in these countries is below the poverty line, the

elite and aspiring middle class make up nearly 20% of the population. However, as economic

development gains traction in these countries, many households are expected to move to the

higher income bracket in the future, increasing the demand for smartphones. While the adoption

of smartphones in developed countries fueled the first wave of global growth, strong demand in

emerging markets, especially Brazil, Russia, India and China, will drive the next phase.

As smartphone usage continues

to grow, mobile Internet

messaging will gradually

replace SMS texts and will

become an indispensable

service. Facebook Messenger

hasn’t seen much success and

the company believes that

separating messaging feature

from the main app will

essential force users to use its

messaging app. We believe that mobile messaging is here to stay, even though the growth in

social networking industry might slow down. This is because mobile messaging enables a very

basic human need to communicate with family and friends day-to-day in a convenient manner. In

some ways, Facebook has acknowledged a weakness in its business as it looks into the future and

is attempting to plug the gap by strengthening its position in mobile messaging market.

Whatsapp’s acquisition was another move in this regard. The company’s multi-app strategy is

aimed at capturing different niches of mobile market, thereby opening up new growth

opportunities and reducing risk. Facebook has seen a consistent increase in its customer base

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over the years as shown in the insert.

Working culture in both these companies is different especially the Business Model for both the

companies. WhatsApp has a no add policy. On the contrary they charge a subscription fees $0.99

USD per year from the user. Facebook on the contrary relies on the old business model: display

ads. Display ads hurt the user experience, and also are not very efficient in producing revenues.

Estimates put Google’s search revenues per pageviews at 100-200 times that of Facebook’s. It is

also important to know that ads work only when the customer has purchasing intent.

With contrasting philosophies it was very interesting that WhatsApp agreed to the deal. In this

report we look at the carious other options WhatsApp had for growth and analyze the present

deal from both WhatsApp as well as Facebook’s perspective.

Life History- Jan Koum and Brian Acton

Facebook has a habit of turning low-profile CEOs into overnight celebrities. First it was Kevin

Systrom, the Instagram head who was instantly the talk of the tech world when Facebook offered

$1 billion for his 13-employee startup in April 2012. Today it’s Jan Koum, who just sold his

mobile messaging platform WhatsApp to Facebook for $19 billion in cash and stock. Koum had

been a relatively low-key CEO, giving few media interviews as his messaging service quietly

grew even faster than Facebook had. But now that he’s at the center of the largest acquisition

ever for a venture-backed startup, he’ll no doubt become a figure in the public sphere.

Koum, who Forbes believes owns 45% of WhatsApp and thus is suddenly worth $6.8 billion (net

of taxes) — was born and raised in a small village outside of Kiev, Ukraine, the only child of a

housewife and a construction manager who built hospitals and schools. His house had no hot

water, and his parents rarely talked on the phone in case it was tapped by the state. It sounds bad,

but Koum still pines for the rural life he once lived, and it’s one of the main reasons he’s so

vehemently against the hurly-burly of advertising.

At 16, Koum and his mother immigrated to Mountain View, a result of the troubling political

and anti-Semitic environment, and got a small two-bedroom apartment though government

assistance. She took up babysitting and Koum swept the floor of a grocery store to help make

ends meet.

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Koum was a troublemaker at school but by 18 had also taught himself computer networking by

purchasing manuals from a used book store and returning them when he was done. After that He

enrolled at San Jose State University and moonlighted at Ernst & Young as a security tester. In

1997, he found himself sitting across a desk from Acton, Yahoo employee 44, to inspect the

company’s advertising system.

Six months later Koum interviewed at Yahoo and got a job as an infrastructure engineer. Over

the next nine years the pair also watched Yahoo go through multiple ups and downs. Acton

invested in the dotcom boom, and lost millions in the 2000 bust.

Brian Acton got his start in the high-tech world more than two decades ago as a computer whiz

kid in Central Florida. At Lake Howell High School, he helped his school math and computer

teams win statewide championships. Amid his honors and awards, however, he showed little

interest in the money side of technology and no hint of the business savvy that would eventually

lead him to the tech center of the world. As a Lake Howell senior, he earned some dual-

enrollment credits at the University of Central Florida and landed a full scholarship to study

engineering at the University of Pennsylvania. After one year, he transferred to Stanford

University to study computer science.

After stints with Adobe Systems and Apple, Acton joined the first wave of hires at Yahoo in

1995. It was there he met Koum, and they became friends.

As Yahoo's vice president of engineering in 2008, Acton said he "sort of retired to take some

time off and decompress." In the early going of WhatsApp, Acton and Koum were bypassed by

many venture capitalists, finally securing a deal with Sequoia Capital, which now stands to reap

several billion dollars from its investment. Acton credited his mother with giving him the

inspiration to help launch WhatsApp.

"My mom started an air-freight company; my grandmother built a golf course," he said. "I have a

certain degree of entrepreneurial risk-taking in my family history. Maybe that eventually rubbed

off on me a little bit."

In September 2007 Koum and Acton finally left Yahoo and took a year to decompress, traveling

around South America and playing ultimate frisbee. Both applied, and failed, to work at

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Facebook. They are part of the Facebook reject club, according to Acton. Koum was eating into

his $400,000 in savings from Yahoo, and drifting.

Then in January 2009, he bought an iPhone and realized that the seven-month old App Store was

about to spawn a whole new industry of apps. He visited the home of Alex Fishman, a Russian

friend, The two of them stood for hours talking about Koum’s idea for an app over tea at

Fishman’s kitchen counter.

Koum almost immediately chose the name WhatsApp because it sounded like “what’s up,” and a

week later on his birthday, Feb. 24, 2009, he incorporated WhatsApp Inc. in California. By early

2011 WhatsApp was squarely in the top 20 of all apps in the U.S. App Store.Two years later in

Feb. 2013, when WhatsApp’s user base had swelled to about 200 million active users and its

staff to 50, Acton and Koum agreed it was time to raise some more money.

How WhatsApp Started

During 1997, Koum had enrolled at San Jose State University and moonlighted at Ernst &

Young as a security tester. One fine day he found himself sitting across a desk from Acton,

Yahoo employee 44, to inspect the company’s advertising system. They both liked each other’s

no-nonsense style of doing work. Six months later Koum interviewed at Yahoo and got a job as

an infrastructure engineer.

When Koum’s mother died of cancer in 2000 the young Ukrainian was suddenly alone; his father

had died in 1997. He credits Acton with reaching out and offering support. “He would invite me

to his house,” Koum remembers. The two went skiing and played soccer and ultimate Frisbee.

Over the next nine years the pair also watched Yahoo go through multiple ups and downs. Acton

invested in the dotcom boom, and lost millions in the 2000 bust. For all of his distaste for

advertising now he was also deep in it back then, getting pulled in to help launch Yahoo’s

important and much-delayed advertising platform Project Panama in 2006. By this time, both

Koum and Acton had gotten unenthusiastic about their work at yahoo.

In September 2007 Koum and Acton finally left Yahoo and took a year to decompress, traveling

around South America and playing ultimate frisbee. Both applied, and failed, to work at

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Facebook. In January 2009, Koum bought an iPhone and realized that the seven-month old App

Store was about to spawn a whole new industry of apps. Koum visited the home of Alex

Fishman, a Russian friend, and the two of them stood for hours talking about Koum’s idea for an

app over tea at Fishman’s kitchen counter.

“Jan was showing me his address book,” recalls Fishman. “His thinking was it would be really

cool to have statuses next to individual names of the people.” The statuses would show if you

were on a call, your battery was low, or you were at the gym. Koum could do the backend, but he

needed an iPhone developer, so Fishman introduced Koum to Igor Solomennikov, a developer in

Russia that he’d found on RentACoder.com. Koum almost immediately chose the name

WhatsApp because it sounded like “what’s up,” and a week later on his birthday, Feb. 24, 2009,

he incorporated WhatsApp Inc. in California.

Help came from Apple when it launched push notifications in June 2009, letting developers ping

users when they weren’t using an app. Jan updated WhatsApp so that each time you changed

your status — “Can’t talk, I’m at the gym” — it would ping everyone in your network. Jan

watched the changing statuses on a Mac Mini at his town house in Santa Clara, and realized he’d

inadvertently created a messaging service. “Being able to reach somebody half way across the

world instantly, on a device that is always with you, was powerful,” says Koum.

The only other free texting service around at the time was BlackBerry’s BBM, but that only

worked among BlackBerries. There was Google’s G-Talk and Skype, but WhatsApp was unique

in that the login was your own phone number. Koum released WhatsApp 2.0 with a messaging

component and watched his active users suddenly swell to 250,000.

After Koum met him, Acton realized he was looking at a potentially richer SMS experience –

and more effective than the so-called MMS messages for sending photos and other media that

often didn’t work. He and Koum worked out of the Red Rock Cafe, a watering hole for startup

founders on the corner of California and Bryant in Mountain View. The two were often up there,

Acton scribbling notes and Koum typing. In October Acton got five ex-Yahoo friends to invest

$250,000 in seed funding, and as a result was granted cofounder status and a stake. He officially

joined on Nov. 1.

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With Android just a blip on the radar, Koum hired an old friend who lived in LA, Chris Peiffer to

make the BlackBerry version of WhatsApp. Through their Yahoo network they found a

startup subleasing some cubicles on a converted warehouse on Evelyn Ave. Even then there was

no WhatsApp sign for the office.

Early Challenges Faced

Early WhatsApp kept crashing or getting stuck. Over ribs at Tony Roma’s in San Jose, Fishman

went over the problems and Koum took notes in one of the Soviet-era notebooks he’d brought

over years before and saved for important projects. The following month after a game of ultimate

frisbee with Acton, Koum grudgingly admitted he should probably fold up and start looking for a

job. Acton balked. “You’d be an idiot to quit now,” he said. “Give it a few more months.”

With Koum and Acton working for free for the first few years, their biggest early cost was

sending verification texts to users. Koum and Acton were using cutthroat SMS brokers like

Click-A-Tell, who’d send an SMS to the U.S. for 2 cents, but to the Middle East for 65

cents. The costs were high enough to drain Koum’s bank account. Fortunately WhatsApp was

gradually bringing in revenue, roughly $5,000 a month by early 2010 and enough to cover the

costs then. The founders occasionally switched the app from “free” to “paid” so they wouldn’t

grow too fast. In Dec. 2009 they updated WhatsApp for the iPhone to send photos, and were

shocked to see user growth increasing even when it had the $1 price tag. “You know, I think we

can actually stay paid,” Acton told Koum.

Tracking Growth Of WhatsApp

By early 2011 WhatsApp was squarely in the top 20 of all apps in the U.S. App Store. During a

dim sum lunch with staff, someone asked Koum why he wasn’t crowing to the press about it.

“Marketing and press kicks up dust,” Koum replied. “It gets in your eye, and then you’re not

focusing on the product.”

Venture capitalists didn’t need the press to tell them WhatsApp was going viral. Koum and

Acton were batting away all requests to talk. Acton saw VC funding as a bailout. But Sequoia

partner Jim Goetz was persistent, spending eight months working his contacts to get either

founder to engage. He’d met with a dozen other companies in the messaging space like Pinger,

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Tango and Baluga, but it was clear WhatsApp was the leader. He eventually sat down with

Koum and Acton at the Red Rock Cafe, answered a “barrage” of their questions and promised

not to push advertising models on them but act as a strategic advisor. They eventually agreed to

take $8 million from Sequoia on top of their $250,000 seed funding.

Two years later in Feb. 2013, when WhatsApp’s user base had swelled to about 200 million

active users and its staff to 50, Acton and Koum agreed it was time to raise some more

money. They decided to hold a second funding round, in secret. Sequoia would invest another

$50 million, valuing WhatsApp at $1.5 billion.

Acquiring offers made by other companies

Google

Google is reported to have offered to buy WhatsApp in a last-ditch attempt for more than $19

billion, but was refused by the WhatsApp co-founders.

Jan Koum and Brian Acton are said to have turned down Google's offer in the belief the

company was only interested in obtaining WhatsApp to keep it out of Facebook's hands.

The Information has reported that Google CEO Larry Page met with Koum a few days after

Mark Zuckerberg had pitched to purchase WhatsApp and for Koum to join his board of directors.

Page supposedly told Koum to stay independent, as WhatsApp was "a big threat to Facebook". A

source claiming to be involved in the deal said Page mentioned how joining Facebook would

have a major impact on "how things play out for years to come".

Another speculated reason WhatsApp declined Google's offer is that Koum was not offered a

seat on its board of directors, unlike Facebook.

Earlier Google approached WhatsApp with an odd offer: It would pay the mobile messaging

startup in exchange for the right to be notified if the messaging app entered into acquisition talks

with other companies, according to a person involved in the process and two people briefed on it.

MICROSOFT

And Gates said Microsoft also would have snapped it up given the chance but wouldn't have

outbid Zuckerberg. Gates explains:

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Microsoft would have been willing to buy it, too “I don't know for $19 billion, but the company's

extremely valuable.”

Unfortunately, this comment came very late in May 2014 after facebook had already acquired

whatsapp.

Facebook’s offer and negotiations

The subject line of the e-mail was like every other come-on that hit Jan Koum’s in-box in the

spring of 2012. He was pounded daily by investors who wanted a piece of his company,

WhatsApp. Hatched on his birthday, Feb. 24, 2009, WhatsApp was emerging as a global

phenomenon. Some 90 million people were using it to text and send photos for free. No social

utility had ever grown as fast. Facebook had only 60 million by its third birthday. And at the time

close to half of WhatsApp users were returning daily.

Koum looked at the e-mail sender: Mark Zuckerberg. Now, that was a first. The Facebook

founder had been using WhatsApp and wanted him over for dinner. Koum stalled, then finally

wrote back saying he was traveling soon and DEALING with server issues. Zuckerberg

suggested they meet before Koum left. Koum forwarded the reply to his cofounder, Brian Acton,

and his sole venture backer, Jim Goetz, a partner at Sequoia Capital, adding the word:

“Persistent!”

Take the meeting, Acton said: “When someone of Mark’s status contacts you directly, you

answer the phone.” Koum had lunch with Zuckerberg later that month at Esther’s German

Bakery, chosen for its discreet back patio and location 20 miles away from Facebook’s campus.

Over their meal Zuckerberg said he admired what Koum had built and hinted at his interest in

combining their two firms.

So began the most lucrative two-year courtship in technology history, one in which admiration

led to friendship and then, in a last-minute hurry, to an unprecedented transfer of wealth, all

signed and sealed on the door of the welfare office Koum, 38, once. Facebook bought

WhatsApp. The deal cements Zuckerberg as tech’s new billionaire-maker. Koum, a shy but

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brilliant engineer who moved from Ukraine to the U.S. with nothing, will join the Facebook

board and, after taxes, pocket $6.8 billion.

His cofounder, Brian Acton, a mild-mannered 42-year-old ex-Yahoo engineer who got turned

down for jobs at Twitter and Facebook, will come away with $3 billion after tax. The deal, he

says, has left him “astonished.” Sequoia Capital, the only venture firm to taste a part of this deal,

walks away with $3.5 billion–a 60-fold return on its $58 million investment.

The numbers are crazy for a company with only 56 employees and roughly $20 million in

revenue, but it made sense for Facebook. WhatsApp, which doesn’t even have a sign on the door

of its headquarters in Mountain View, is one of the world’s most commonly used communication

utilities after e-mail and the telephone and will introduce voice calling later this year.

Its 470 million users have already erased $33 billion in SMS revenue from wireless carriers that

got rich and fat charging per text. WhatsApp charges nothing for the first year and then asks you

to pay $1 a year thereafter. No ads, no stickers, no premium upgrades. In later discussions

Zuckerberg promised the WhatsApp founders “zero pressure” to make money, saying, “I would

love for you guys to connect 4 to 5 billion people in the next five years.”

WhatsApp could eventually make Zuck a lot of money. It costs WhatsApp five cents to support

each user, and it’s charging customers in only a handful of countries, like the U.S. and Britain,

where mobile payments are relatively mature. WhatsApp believes $1 billion in annual revenue is

within reach by 2017 as the service grows and billing falls into place. Insiders say the app could

also start charging airlines or companies like Uber for the right to send messages to WhatsApp

users with their permission.

The big risk, as always, is a mass exodus of users to the next new thing. That doesn’t seem

likely right now. WhatsApp, Acton confirms, has been signing up a million new users per

day since Dec. 1, 2013.

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Pretty much everyone in Hong Kong with a smartphone uses WhatsApp. In United

Arab Emirates you can watch WhatsApp Academy on TV. In the Netherlands, where 9.5

million people (more than half the population) actively use it, “Whatsappen” is now a verb in

the Dutch dictionary, meaning to send a WhatsApp message. Brazil’s professional soccer

players use its group-chat feature to organize labor strikes during games.

“Sometime in the not too distant future,” says Sequoia’s Goetz, “WhatsApp is likely to eclipse

all SMS traffic across the globe.” (Perhaps it’s no surprise that Zuckerberg reportedly held a

private meeting with 20 telecom executives last week to ease their fears of being buried by free

web-based services like Facebook and WhatsApp.)

Back in 2012, before all the craziness, Koum had time to mull over his lunch with Zuckerberg.

He and Acton had $8 million from Sequoia and wanted nothing more than their independence.

They rarely went to Silicon Valley networking events and didn’t entertain bid offers. So

Facebook’s overtures from then on never turned into bids on paper. Zuckerberg and Koum

instead became friends, meeting once a month or so for dinner.

For the next year WhatsApp focused on its march past 300 million users. In June mid-2013 the

founders happened to meet Sundar Pichai, who oversees Android and Chrome at Google. They

talked about their love of clean and simple digital products. At some point around early 2014

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Pichai decided it would be good for Koum and Acton to meet his CEO, Larry Page. They agreed

to meet on Tuesday, Feb. 11.

On the Friday before that meeting a WhatsApp staffer ran into Facebook’s head of business

development, Amin Zoufonoun, and told him that Koum was meeting with Page imminently.

Zoufonoun, who helped broker Facebook’s $1 billion Instagram acquisition in April 2012, went

back to his company and set the wheels in motion to accelerate an acquisition offer that had

already been in the works for some time.

Zuckerberg got Koum over to his house Monday night and finally floated the idea of an

acquisition that would leave WhatsApp independent and crucially, make Koum a board member

of Facebook. “It was a partnership, where I would help him make decisions about the company,”

Koum recalls. “The combination of everything that was discussed is what made it very

interesting for us.”

The next day Koum and Acton drove to Google’s Mountain View headquarters and met with

Page and Pichai in one of the company’s gleaming conference rooms. They talked for an hour

about the world of mobile and WhatsApp’s goals. “It was a pleasant conversation,” says Koum.

Page, he adds, is “a smart guy.”

When asked if he got the impression Page was interested in buying WhatsApp, Koum pauses.

“No,” he says. Maybe there was a hint? “Maybe I’m not good at reading him.”

If Page had been interested in buying WhatsApp as some reports have recently suggested, the

meeting might have been too little too late. Things had already been set in motion at Menlo Park,

and at WhatsApp the founders and their advisors were calculating how much they could

conceivably ask for in deal talks. One source close to the company says WhatsApp’s founders

were more interested in independence than money, but another says they also believed

themselves to be worth at least $20 billion, a number calculated by looking at

the market capitalization of Twitter (currently $30 billion), WhatsApp’s global user base and the

company’s future plans for monetization.

On Thursday Koum and Acton went to Zuckerberg’s house for dinner at 7 p.m., where Acton

met Zuckerberg for the first time.

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“One day I want you to become bigger than us in number of users,” Zuckerberg told them.

“What you guys do is a much more common-use case.” Zuckerberg said he wanted them to keep

doing what they were doing but with the might of Facebook’s legal, financial and engineering

resources.

At 9 p.m. Acton went home to tend to his young family. Koum and Zuckerberg played high-

stakes poker: One source says that Zuckerberg Offered a range of $15 billion and higher, and

that Koum said he was looking for something closer to $20 billion. Facebook’s founder asked for

some time.

The following day, Friday, Feb. 14, Koum and Acton posed for a photo shoot with FORBES at

their Mountain View office. When the photographer left at 6:30 p.m., Koum got in his Porsche

and stopped at Zuckerberg’s house for another meeting. Koum denies a report that he interrupted

the Zuckerbergs’ Valentine’s Day meal. “It wasn’t like there was dinner and candlelight and I

barged in through the door.”

Until then he had tended to leave the Zuckerbergs’ house when Mark’s wife, Priscilla Chan,

came home from work. Over snacks Koum and Zuckerberg hammered out the final details of the

partnership and WhatsApp’s all-important independence under Facebook, but the two weren’t

yet in agreement.

Finally, on Saturday night Koum and Zuckerberg went from talking in the kitchen to the living

room couch, before Zuckerberg offered $19 billion as well as deal terms that Koum liked. It was

“something we can probably do on our end,” Koum replied.

Koum waited for Zuckerberg to leave the room and got on the phone to Acton, who was at home.

It was around 9 p.m. “I just want to check if you’ve made a decision either way,” Koum said,

giving his friend the finalized details. “Do you want to move forward?”

“I like Mark,” Acton replied. “We can work together. Let’s make this deal.”

Koum walked out of the room and found Zuckerberg. “I just talked to Brian,” Koum said. “He

thinks we should work together and that you’re a good guy and we should do it.”

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The two of them shook hands and then hugged. Zuckerberg remarked it was “f–king exciting,”

and whipped out a bottle of Johnnie Walker Blue Label, which he knew was Koum’s favorite

Scotch. They each called their business-development directors to come over and finalize the

process. About an hour later Koum drove home in his Porsche and went to bed.

Lawyers and bankers raced through the weekend to get deal papers to sign by Wednesday

morning before everyone broke for the annual Mobile World Congress in Barcelona. Rather than

signing them at WhatsApp’s headquarters, they drove two blocks, at Jim Goetz’s suggestion, to

101 Moffett Boulevard, the abandoned building where Koum once collected food stamps as a

teenager. Koum signed them on the main door.

When they got back to the office, Koum sent a WhatsApp message to “All WhatsApp,” the chat

group for company employees, and called them into the conference room for a 2pm meeting.

“Look, here’s what’s happening,” he said after everyone had piled into the room. “We’re

merging with Facebook.” Koum and Acton told their shocked employees they would be okay

and still operate on their own. At 2.30 p.m. the conference-room door opened again and in

walked Mark Zuckerberg. He spoke briefly with WhatsApp’s small staff and shook hands. After

a conference call with investors, Koum got back to work.

“We still have a company to run,” he says matter-of-factly.

Now it’s down to Zuckerberg and Koum to figure out how to make WhatsApp worth the $19

billion Facebook just paid for it. The first move is to make sure the app keeps working. The

Saturday after the deal was announced people around the world slammed WhatsApp’s servers

with new sign-ups. The app suffered a four-hour outage. The timing was coincidental, according

to Acton, but nonetheless bad for a startup that prides itself on reliability.

Koum and Acton are so fixated on uptime that no one is allowed to talk to WhatsApp’s server

guys in the months before Christmas as they prepare for the message deluge. Visitors are rarely

allowed into the office, lest they be a distraction. A whiteboard in the office shows the number of

days since the last outage or incident, as a factory might show a tally for injuries or deaths.

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“A single message is like your firstborn child,” says Acton, a new parent himself. “We can never

drop a message.” He pulls up a photo of his late stepfather, sent to his phone in April 2012. “This

is why I hate Snapchat,” where photos and messages disappear after viewing.

WhatsApp’s success boils down to a couple of technical advantages: Koum made it one of the

first mobile apps to sync with a phone’s contacts. After he got fed up with forgetting his Skype

user name and password, he went through the painstaking process of phone-number

normalization for WhatsApp, ditching logins and passwords to make his service as simple as

sending an SMS. The numbers on your phone are “your real life network,” he says.

Koum and Acton also picked up years of experience at Yahoo in building networks to scale,

servers that could handle hundreds of millions of people’s data without buckling. They knew to

restrain their user growth in the early days where other startups would have ramped up.

“Instead of the standard mentality of ‘get big fast…’” says Acton. “We took a different

approach,” Koum adds. Instead of Amazon cloud services, WhatsApp also uses dedicated

servers that run on niche operating systems like Erlang, built for telecommunications, and

FreeBSD, an older alternative to the more-popular Linux, that is dedicated to servers. It

gives them a tighter control on infrastructure.

WhatsApp’s speed and deceptively simple interface could see it permanently trump its peers in

the same way Facebook beat out rivals MySpace and Orkut, but its old-fashioned business model

is unusual. Though other messaging apps like China’s WeChat, South Korea’s KakaoTalk and

Canada’s Kik significantly trail WhatsApp in active users, they’re free and they sell ads, games

and digital stickers that have seen them book heftier revenues.

WeChat, owned by state-backed Tencent and billionaire Ma Huateng, is letting some of its 270

million active users buy snacks in vending machines in the Beijing subway as an e-payments

experiment. Analysts at Barclays estimate it to be worth $30 billion. Kakao is forecasting $200

million in revenue for 2013, deriving half of that from games. LINE, widely expected to IPO this

year at a reported $8 billion valuation, brought in $336 million in 2013 revenue from a mix of

selling digital stickers, in-app games and special accounts for advertisers.

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Such extras are “junk,” says Acton. He fears stickers would draw WhatsApp into the

content business; LINE’s series of bunny and bear sticker characters have already made

appearances on TV shows in Japan. The unsexy mission of WhatsApp is reliability.

The dollars will start coming in greater numbers once WhatsApp can iron out dead-simple billing

arrangements with wireless carriers. Koum doesn’t want to risk putting users off with a

complicated payment-request system and watch them run to free rivals. Right now it charges

only in the handful of countries like the United States and United Kingdom, where credit card

penetration is high and mobile payments are mature; that’s still not the case in the Netherlands,

where half the population use WhatsApp but aren’t yet charged for the privilege.

Google is striking billing deals with carriers on behalf of all Android apps, but progress has been

slow: Android carrier billing is available in just 21 countries, and to the ongoing chagrin of other

developers, mobile payments still aren’t standardized. Koum thinks the real money will start

flowing by 2017 and beyond, at which point he plans to have 1 billion users.

“We are very early in our monetization efforts,” says Neeraj Arora, WhatsApp’s business-

development manager. “Revenue is not important to us.” Arora has brokered partnerships with

about 50 carriers to pre-bundle the app into texting plans. The company has also struck a

noncommercial partnership with Nokia to put a WhatsApp button on the inexpensive Asha 210

phone.

Keeping people from switching to another service is priority number two. The fear of losing

eyeballs is what drove Zuckerberg to pay so dearly, but competitors say there’s still not much

stopping them from leaving WhatsApp, and that the founders have tunnel vision.

“For the last five years WhatsApp has been exclusively focused on delivering ‘SMS but free,’

and they have done a great job at that. But at some point the user is going to move on,” says Ted

Livingston, a former BlackBerry engineer who founded the teen-friendly mobile messenger Kik,

which sells digital stickers and lets its users play games with each other.

“This is why WhatsApp feels like BlackBerry to me. For years BlackBerry was exclusively

focused on e-mail. But once the consumer understood this, they asked, ‘What comes next?’ The

iPhone answered that question, and all of a sudden BlackBerry was left behind.”

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For now Koum is staying focused on the two priorities: keeping WhatsApp running and keeping

users from going away. He can do so without the burden of building out the financial and legal

infrastructure of a wholly independent company. “Fundamentally what we care about is building

a product and great user experience,” he says. “[Mark] understands the network effect and he

always talked about making the world more open and connected. Connected is where we come

in.”

It is believed by many experts that WhatsApp was early to sellout to Facebook. Some of the

reasons given are:

WhatsApp could have been much bigger in five years time. Industry experts believe that

the company could have been valued at $200 billion in 5 years time.

The company could have achieved greater heights had it been independent.

They could have build on the platform further leading into e-commerce industry.

They could have, alternatively, gone for IPO to finance their growth.

Facebook’s perspective

Facebook's acquisition of WhatsApp benefits the social network in a three important ways: It

better positions it to reclaim the teen demographic, a key group of users who have grown

disinterested in Facebook it allows Facebook to buy its way into mobile messaging, one of the

hottest emerging markets that the social network has failed to penetrate; and it presents Facebook

with a big growth opportunity.

The WhatsApp acquisition also propels Facebook to the top of mobile messaging, a market that

it has so far failed to tap. Popular photo messaging app Snap chat famously rejected two offers

from Facebook: one for $1 billion and the second for $3 billion cash. Its own messaging app,

Facebook Messenger, launched in 2011, but it has failed to reach engagement levels that

WhatsApp has achieved.

"Facebook is going to get data on millions of users out of this acquisition, too.”They're going to

have better opportunities to understand mobile use patterns and mobile customers, and use that

information in all sorts of context -- perhaps in advertising in other mobile channels."

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While WhatsApp and Facebook Messenger share similarities. Messenger generally isn't used to

communicate in real time, while WhatsApp is. "Those are big differences in use cases, and the

world needs both. We will help by investing in both.

While Facebook has exceeded 1.2 billion monthly active users, its challenge is reaching the next

billion, which will likely come from developing countries. That's where WhatsApp is thriving.

"WhatsApp is a player that is strong in both mature markets as well as emerging markets across

Asia and the Middle East, which present a significant growth opportunity for Facebook.

WhatsApp’s strength is in emerging markets. "There are countries [such as] Korea or Japan

where another messaging service is bigger, but if you look across the world, WhatsApp -- across

Europe, Latin America, India, a lot of places in Asia -- is the clear leader."

WhatsApp's nearly half a billion users are part of the long-term plan to get Facebook on

smartphones around the world Whatsapp has 450million users with 70% active daily, which is

already 60% the size of Facebook’s daily user community (550million.) By bringing these

people into the Facebook corporate family it assures Facebook of continued relevancy as the

market shifts.WhatsApp is much stronger than Facebook Messenger in Europe, Latin America,

Africa and Australia and has attracted users at a time when it appears that young people are

turning away from Facebook .Facebook has fallen behind in mobile phone messaging apps in

emerging markets, where many are accessing the Internet on fast-growing 3G mobile networks

for the first

The target is reaching 5.6 billion smartphone users by 2019

In the prepared statement for the acquisition, Facebook founder and CEO Mark zuckerberg said

whatsapp is on a path to connect one billion people. The services that reach that milestone are all

incredibly valuable.

This is undeniably true, in the short term. WhatsApp is adding 1 million new users a day and

already has 450 million monthly active users (MAUs). At this growth rate, it could reach the 1

billion MAU mark by early 2016 (allowing for some new users not becoming MAUs).

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WhatsApp will gain 1 billion MAUs in the next five years. But the ultimate target is significantly

larger. Industry estimates for global smartphone adoption is that there will be 5.6 billion

smartphone users by 2019 which is very beneficial for Facebook to get wider reach.

The major growth will be in emerging economies, where WhatsApp is well-established

For Facebook to grow significantly beyond its current 1.23 billion MAUs, it needs widespread

take-up in the emerging economies. WhatsApp is a "clear leader in Europe, Latin America, India

and Asia".

WhatsApp recently said that it had gained 35 million MAUs in India alone demonstrating its

appeal to users in the regions which Facebookis keen to target.

What is often overlooked, however, is that many of the new users for mobile communications

will be accessing the services by low-cost feature phones, not smartphones. Facebook itself is

well aware of this consumer need. It has a dedicated service for these users, Facebook for Every

Phone, but this reported only 100 million MAUs in July 2013.

WhatsApp, with its engineering-led approach, is available on a wide range of devices (iPhone,

BlackBerry, Android, Windows Phone and Nokia) and has a good reputation for working

effectively in areas where mobile coverage is poor. It also has deals with mobile operators

whereby the carriers offer their own customers low-cost data packages for use with WhatsApp.

Five years after its founding, the company has 450 million active monthly users, of which a

staggering 315 million uses it every day. WhatsApp is adding 1 million new users a day - 1

million! Facebook thinks WhatsApp could have 1 billion users in a few years, and this estimate

seems conservative. (Facebook itself only has 1.2 billion users.) WhatsApp also does a lot more

than "text-messaging." It allows users to send photos, videos, and voicemails to each other and

keep the conversations forever. In short, it allows users to do a lot of what Facebook does.

Facebook has fallen behind in mobile phone messaging apps in emerging markets, where many

are accessing the Internet on fast-growing 3G mobile networks for the first time on smartphones.

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Asian rivals such as Tencent Holdings Ltd.’s We Chat, Naver Corp’s Line and Rakuten Inc’s

Viber are well ahead of Facebook messenger across much of Asia.

Facebook has been buying apps with large numbers of young users as part of Chief Executive

Officer Mark zuckerberg’s strategy of helping users share any kind of content.

WhatsApp has very low costs, so it should eventually be wildly profitable.

WhatsApp currently has only 55 employees. Assuming an all-in cost of $200,000 per employee,

that's a total cost base of $11 million. Let's assume WhatsApp grows to, say, 300 employees over

the next few years. Then it will have a cost base of only $50-$75 million. Meanwhile, if the

company's growth trajectory continues, it could easily be pulling in more than $1 billion a year

of revenue in a few years. Almost all of that would be profit.WhatsApp will continue to operate

independently within Facebook. The product roadmap will remain unchanged and the team is

going to stay in Mountain View. Over the next few years, we're going to work hard to help

WhatsApp grow and connect the whole world. We also expect that WhatsApp will add to our

efforts forInternet.org, our partnership to make basic internet services affordable for everyone.

WhatsApp will complement our existing chat and messaging services to provide new tools for

our community. Facebook Messenger is widely used for chatting with your Facebook friends and

WhatsApp for communicating with all of your contacts and small groups of people. Since

WhatsApp and Messenger serve such different and important uses, we will continue investing in

both and making them each great products for everyone.

The brands are diversifying Facebook group and its revenues

The mobile brands are making Facebook effectively into a virtual group of companies. They are

diversifying Facebook's total user base by appealing to groups of users who may be disinclined

to join or regularly participate in Facebook, such as teenagers. They can also run their own

business models. This diversifies Facebook's mobile revenues, just as these become increasingly

critical to the company's finances.

Where Facebook itself has successfully monetized via advertising on its own mobile apps,

Zuckerberg said in the conference call: "I don't personally think ads are the right way to

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monetize messaging systems."

It fits with Zuckerberg's mobile strategy of standalone mobile brands

Zuckerberg has taken the view that Facebook does not have to be the brand for all of Facebook's

mobile operations.

The Instagram app, which Facebook owns, still looks to consumers as a separate entity. Even the

Facebook Messenger app, Facebook's own equivalent of WhatsApp, was rebranded simply as

Messenger last year and the latest Facebook app is named Paper.

The deal pre-empts Asian messaging apps from closing Facebook out of the emerging

nations

Facebook is confronted by three large and well-funded messaging providers based in Asia, which

represent next-generation, mobile-native social networks: KakaoTalk, Line and We Chat. They

are all expanding aggressively into the same regions where Facebook needs to grow.

If any one of these had succeeded in buying WhatsApp, it would have been a strategic disaster

for Facebook, denying it solid expansion potential across dozens of key markets.

Conclusion

Looking at the deal from neutrals prospective it can be said that Facebook has taken a positive

risk by buying out WhatsApp. It will get access to WhatsApp’s customer base and will continue

to grow. Although it remains to be seen whether WhatsApp is allowed to function as an

independent business unit or rebranded by Facebook. From WhatsApp point of view the value

offered was huge and tempting. Also they saw the opportunity to grow with vast base of

Facebook. From the outside it looks to be brilliant move on both side but careful examination

reveals risks involved on both sides. WhatsApp might have undervalued their firm as did owners

of YouTube, Instagram and PayPal realized later. Facebook on the other hand will be trying hard

for its own products to compete with WhatsApp and in the process keep the standards of the

WhatsApp to its present level. Problems such as cannibalization and whether to allow WhatsApp

to work as a separate business unit have to be sorted out. Only time will tell whether the deal was

a success or failure.

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