Is This The Real Reason Facebook Acquired WhatsApp?

WhatsApp will expand its service into voice communications.

Feb 24, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks started the week on a positive note on Monday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.73% and 0.76%, respectively, at 10:15 a.m. EST.

It's not just about messaging. Last Wednesday, Facebook (NASDAQ:FB) stunned the technology industry when it announced a gargantuan $19 billion acquisition of messaging platform WhatsApp, which, despite having maintained a low profile in the U.S., boasts 450 million users worldwide. Today, WhatsApp co-founder and CEO Jan Koum announced to participants at the Mobile World Congress in Barcelona that the company will add voice communications to the service in the second quarter. This is more bad news for telecommunication carriers, which have already lost billions of dollars in SMS revenue to the upstart service. (It is estimated that WhatsApp's total message volume is roughly equal to that of text messages via all telecom providers combined.)

WhatsApp's success is due to several factors:

  • A clean interface, dedicated to messaging and uncluttered by ads. WhatsApp has vowed that the service will continue to be ad-free; comments by Facebook CEO Mark Zuckerberg confirm that his thinking is consistent with that commitment.
  • A highly unintrusive application. In an industry in which many applications try to collect as much information about their users as possible in order to monetize the data with advertisers. WhatsApp has followed the exact opposite line. As Koum said in Barcelona, "We as a company and product want to know as little as possible about our users. We don't want to know your name or where you live. There's no plans to change that."
  • Free! Or almost free, anyway: the first 12 months are free, after which users pay $1 per year.
  • Reliability. Right from the start, WhatsApp's team made the stability and reliability of the platform an absolute priority (yes, I know that the service went down for approximately three hours this weekend.)

WhatsApp provides the ability to send pictures, video, and voice messaging, so voice communications is a natural addition. Of course, it won't be the first service to offer voice communications over the Internet -- the first significant disruptor in this area was Skype (now owned by Microsoft), which had 300 million users at the start of 2013. However, if WhatsApp can provide the same reliability in this area, it could be a powerful differentiator (as a Skype customer, I have never been entirely satisfied with that aspect of the service.)

I've been unequivocal that I do not see how Facebook can make the WhatsApp acquisition work on an economic basis, given the price it is paying. Nevertheless, that doesn't diminish my admiration for what WhatsApp has accomplished, and it looks like the company has plenty more up its sleeve. While Facebook shareholders may not get a good return on the acquisition, it looks like WhatsApp will continue to provide plenty of value to its users -- and give fits to established competitors in the telecom industry.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. 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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