It's difficult to call Facebook's (NASDAQ:FB) $19 billion acquisition of WhatsApp anything more than speculation. While it's certainly possible (although not easy) to imagine ways Facebook could get its money out of this acquisition if the app continues on its impressive growth trajectory, the risk Facebook is taking on in the deal is undeniable. The purchase can be only be justified with optimistic forward-looking assumptions -- a notion usually referred to as speculation, not intelligent investing. The risk in Facebook's pricey acquisition is highlighted by two major challenges looming over WhatsApp that simply can't be ignored.
Monetization has only just begun
Sure, 2 billion users paying one dollar each, on top of some potentially lucrative profit margins, could add up to a serious business. Even more, Facebook CEO Mark Zuckerberg said during the question-and-answer session at the yearly Mobile World Congress last week that "other messaging apps are already monetizing their users at $2 to $3 a head," according to The Wall Street Journal.
But let's bring this lofty speculation down to earth. First, it would be naive to assume that just because WhatsApp has grown to a half of a billion users so rapidly that it could eventually reach 2 billion. Second, it was only last summer that WhatsApp transitioned to a subscription model that consists of a measly $1 after hooking users with no fees during their first year. The result is a paltry $20 million in estimated revenue in 2013 -- a tiny rounding error in a $16 billion deal. As an unprecedented business attempts to monetize its user base at a scale no messaging service has ever operated at, why should investors be confident the rest of WhatsApp's user base would be willing to fork out the subscription fee?
$1 per year is good, but free is better
Last week, WhatsApp experienced its longest outage in history: four hours. During these four hours, a competitor to WhatsApp called Telegram received 5 million downloads and skyrocketed to the top free download in Apple's App Store in the 46 countries. Apparently Facebook's new app already has a viable substitute.
Not only does Telegram look like somewhat of a clone to WhatsApp, but it also has taken its promises even further than Facebook's new messaging app. While WhatsApp promises to never have ads on the service, Telegram has promised to make its service free forever, period. That means no ads and no subscription fees -- an awfully better value proposition than $1 per year.
Other than being an excellent substitute to WhatsApp, Telegram actually has some potentially popular features. For one, the company prides itself on its security and is subsequently offering $200,000 to anyone who can crack the security of its MTProto. Further, Telegram has a SnapChat-like feature that allows users to set a self-destruct timer on messages, enabling what Telegram calls Secret Chats.
Nothing to scoff at
Given that Telegram has both proven to be a formidable substitute and that WhatsApp arguably has not proved monetization at meaningful scale, Facebook ought to respectfully fear Telegram and hopefully come up with a plan to compete with free. The task doesn't sound easy. With challenges like these, it is far too early for investors to get excited about Facebook's new app.
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Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.