I've long been a skeptic of Facebook's (NASDAQ:FB) massive WhatsApp acquisition, mostly because I still think the social network overpaid, which in turn creates significant impairment risk for all that goodwill should the deal fall short of those lofty expectations. By paying $22 billion by the time the deal closed -- Facebook's largest acquisition by far -- the company significantly raised the bar in terms of what the acquisition must deliver.
The good news is that Facebook is now starting to think more seriously about monetizing WhatsApp, and the revenue model will largely resemble Messenger's: connect consumers to businesses via a messaging platform and charge the businesses, with a modest side of ads. Now, we have a better idea of why Facebook wanted WhatsApp so badly in the first place.
Big Brother Zuck
The Wall Street Journal reported earlier this week that Facebook's 2013 acquisition of mobile analytics and performance optimization company Onavo gave it unique insights into what other apps and services people were using.
The Onavo Protect app is supposed to provide greater security for users by creating a virtual private network (VPN). Little did they know that all that information was being sent to Facebook's servers, where Facebook would analyze the aggregated data. That also tipped Facebook off that one of its key rivals was already starting to flail.
However, there's another rather interesting snippet from the WSJ report:
Within a few months of Facebook's acquisition of the Tel Aviv-based company in 2013, Onavo's data paved the way for the social-media firm's biggest deal, the February 2014 purchase of WhatsApp for what eventually was $22 billion, the people familiar said.
Onavo showed the messaging app was installed on 99% of all Android phones in Spain -- showing WhatsApp was changing how an entire country communicated, the people said. That metric in particular put Facebook on notice, the people said.
Facebook acquired Onavo in October 2013, just four months before announcing the WhatsApp deal. It was always clear, even in 2013 and 2014, that WhatsApp was becoming hugely popular in emerging markets as a viable SMS replacement. Now we see that Facebook had additional granular data that drove its interest in the start-up, which had posted just $22.7 million in revenue and a net loss of $311.9 million in the trailing 12 months prior to the $22 billion acquisition.
Still, just because Facebook knew how popular WhatsApp was becoming doesn't mean it had to pay an arm and a leg.
The fine print
The information that Onavo collects includes: "Information about your mobile applications and data usage, including the applications installed on your device, your use of those applications, the websites you visit, and the amount of data you use." As far as how Onavo uses this information? "Analyze how you use applications and data. For example, we may combine the information, including personally identifying information, that you provide through your use of the Services with information about you we receive from our Affiliates or third parties for business, analytic, advertising, and other purposes."
The policy tells you it might share all of this with the mothership (emphasis original): "For example, we may share personally identifying information with third parties and "Affiliates" (businesses that are or become legally part of the same group of companies that Onavo is part of, including but not limited to Facebook, Inc.) to operate, maintain and enhance the Services, or for other purposes as described below."
Snooping on Onavo Protect users (who obviously agreed to the terms of services) is in part why Facebook went after WhatsApp so aggressively.
Evan Niu, CFA owns shares of Facebook. Evan Niu, CFA has the following options: long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.
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