Is Facebook Inc. Out to Destroy Traditional Telecom?

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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 25, 2014, at 6:20 AM, shab05 wrote:

    What ever being said, this is still not fair. The problem is, People were forced to accept decision of FB buying instagram for 1 billion, and when they successfully forced it, they went onto to try and force accepting 19billion for whats up. This is insanity by all means. Many Media People are justifying it. Fine, even if this acquisition is required, where are all the rumors of Job site, Pay pal site, and mobile device rumors. They could have done all this if they are afraid of loosing users. Buying for 19 billion when they made FB messenger and not marketing it is too bad. This is too bad by all means, and if this was done by other companies, i am sure wall street would have behaved differently.

  • Report this Comment On February 25, 2014, at 6:28 AM, shab05 wrote:

    For sure, there are people to fall for traps like this even after it has gone to this level. Almost all here to whom i had interacted with had already started criticizing FB act and criticizing the media which promotes it. By Supporting FB at this juncture, the supporting media is loosing their credibility and trust.

  • Report this Comment On February 25, 2014, at 10:54 AM, FunkyBusiness wrote:

    Hello,

    Zuckerberg said "no ads on whatsapp", Maybe I'm a little be old fashioned, maybe i don't understand what is going on with this deal, but I am all ok about Tim's article. My personal thinking is this.

    If in the near future (when whatsapp's userbase is at the top and the growthfactor starts to slow down considerabely) Zuckerberg may simply integrate whatsapp into the facebook platform, so that you have to go through facebook to get to the whatsapp application.

    1. Zuckerberg still kept word not loading whatsapp with ads

    2. Maybe this is an unexpected bingo: by going through facebook where ads are a usual thing, you have now a few hundred million users looking at least at one ad while getting to whatsapp. I think even for whatsapp users this is an acceptable deal.

    Well, I'm not sure about this, but then again, coud be!?

  • Report this Comment On February 25, 2014, at 9:37 PM, youreafool wrote:

    You don't seem to have a coherent thesis. whatsapp has nothing to do with the underlying physical network telecom is based on, and a few erlang devs, neat, maybe a few mill neat, your thesis is orders of magnitude from making any kind of sense, (you seem confused about tech in general).

  • Report this Comment On February 26, 2014, at 8:53 AM, TMFMileHigh wrote:

    @youreafool,

    >>whatsapp has nothing to do with the underlying physical network telecom is based on ...

    Which is why I didn't claim that. Instead, WhatsApp has proven particularly adept at circumventing that network for users' sake. All the more important now that there's a plan to offer voice service:

    http://www.cnn.com/2014/02/24/tech/mobile/whatsapp-voice/

    Foolish best,

    Tim

    --

    TMFMileHigh in CAPS and on the boards

    @milehighfool on Twitter

    http://about.me/timbeyers

    http://timbeyers.me

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