Is Facebook Inc. Out to Destroy Traditional Telecom?

A $19 billion deal for WhatsApp could help Facebook, Inc. to become much more than the world’s largest social network.

Feb 24, 2014 at 7:02PM

Koum Signing Fb Deal

Cofounder Jan Koum signs away WhatsApp in a $19 billion deal. Credits: Jan Koum, Forbes.

In acquiring WhatsApp for $16 billion in cash and stock, and $3 billion more in incentives, Facebook (NASDAQ:FB) appears to be going after not so much Google, but the major telecommunications networks. How can we know? We can't. And yet it's worth noting that CEO Mark Zuckerberg sees WhatsApp as something much bigger than a deal to plug holes in Facebook's platform.

"We expect that, over time, WhatsApp will help us make progress in our mission to connect the entire world through things like Internet.org by supporting our goal of delivering basic Internet services to everyone in the world at affordable prices," Zuckerberg said during the conference call announcing the deal.

You know who isn't contributing to Internet.org? Telecommunications firms... and for good reason. The very idea of cheap (or even free) Internet is hugely disruptive to anyone in the business of selling pipes and bandwidth.

Don't take my word for it; look at the numbers. AT&T's (NYSE:T) wireless data revenue zoomed 16.8%, to $5.7 billion in Q4. WhatsApp helps to circumvent the sort of pay-to-play SMS services employed by AT&T and other major carriers, delivering on the order of 19 billion messages, and 600 million photos daily.  

The price of acquiring scale
But is the network really worth $19 billion -- $1 for each message sent in a given day? Skeptics will note that, in keeping WhatsApp distinct, it's tough to envision a scenario by which Facebook will ever make money on the deal. Fair point. And yet I wonder if Zuck's target wasn't so much WhatsApp's users, but its technology.

A post on the Tumblr site for Sequoia Capital -- an early backer of WhatsApp -- talks up four numbers that explain why Facebook made the deal. I think "32" is the only one that really matters, referring to the number of developers WhatsApp has on staff. Each one supports some 14 million active users. An astounding ratio, to be sure.

Facebook now gets access to the underlying system, which is built on Erlang, a programming language designed to handle concurrent data streams deftly. The social network had been using Erlang for Chat at one point, and may still. WhatsApp has gone further by figuring out how to use the tech at a scale never before seen, while still achieving 99.9% uptime so that, as Sequoia partner Jim Goetz says on Tumblr, "users can rely on WhatsApp the way they rely on a dial tone."

Maybe that isn't worth $19 billion. So be it. I'm more intrigued by the idea of the Internet giving birth to a direct, uninhibited, cheap, worldwide communications network. In acquiring WhatsApp, Facebook just took a step closer to becoming that sort of platform.

Now it's your turn to weigh in. What did you think of Facebook's WhatsApp deal? Will you keep using the service? Leave a comment below to let us know where you stand, and whether you would buy, sell, or short Facebook stock at current prices.

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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Google at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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