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Yes, Facebook Will Regret Its Massive WhatsApp Deal

By Tyler Lacoma – Feb 28, 2014 at 9:00PM

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What is Facebook thinking, acquiring an anti-Facebook app?

After failing at the Snapchat acquisition, Facebook(META 0.85%) swooped in and bought WhatsApp for $19 billion (well, $16 billion and restricted stock). This acquisition raises questions concerning Facebook's plans with a mobile app that appears to be at odds with the company's current monetization model..

Zuckerberg made an offer the owners couldn't refuse, since CEO Jan Koum said only two months ago that there were no plans to sell the business. The move is likely an attempt to redeem the Facebook brand after reports from iStrategylabs and others indicated that the social network had lost as many as three million teenagers in recent years. The newer, sexier WhatsApp, on an upward trajectory since its founding in 2009, must have seemed appealing and Facebook quickly jumped above $69 at the news. But the future raises questions on how the social network will manage WhatsApp.

WhatsApp is what's up
WhatsApp had a great 2013. Halfway through the year, the messaging service had 200 million users. By the end of the year, it had 450 million with 400 million photos sent through the network per day. As a point of comparison, that's 50 million more than SnapChat and about 350 million more than Instagram.

The company was also uniquely positioned to turn the tables on old social media: Its basic app lets people send each other simple messages, media, and fun little icons with neither muss nor fuss. WhatsApp's dedicated focus on full privacy -- no ads, no marketing data, and no gimmicks -- was presumed to be winning over coveted young social users en masse. Its $1 annual subscription fee certainly won over crowds in emerging markets like Brazil and India, where users were enchanted by the minimalistic app and its extra-low fees.

Even the pricetag, while raising eyebrows in the media, isn't really that bad. For $19 billion, it works out to around $42 per user, which is a much better deal than Facebook would have got if it acquired, say, LinkedIn, which is worth nearly $88 per user. But here's the problem: Everything that made WhatsApp a success runs against the strategy Facebook has adopted for the past several years. The two are simply incompatible.

Killing the Goose
As Facebook tries to monetize, its efforts have focused on marketing, tracking, and ads. It offers ad exposure through Instagram. It charges companies for more visible posts in the Facebook news feed or personalized ads using profile data. These tactics simply won't work with WhatsApp, which has been built from the ground up as a private, ad-free space. To monetize WhatsApp through ads would ruin its core competencies. To start charging higher subscription fees would destroy the app's emerging market potential and drive away younger users.

The primary way out is to make massive changes to the WhatsApp model – changes that will directly alienate its userbase. The catch-22 is obvious, so what does Facebook think it's doing? Does the network want to a develop a separate, ad-free segment targeted at youth? Could that segment survive association with the Facebook name? There are too many unpleasant questions here.

The network would have been better served by imitating LinkedIn(LNKD.DL) and the company's recent decision to cut communication restrictions, offering current users more freedom to express themselves or influence one another. LinkedIn, upgraded to "outperform" by RBC Capital at the end of February, understands its competencies and how to manage them properly -- the 3% gain its stock saw on the upgrade (plus more potential gains as LinkedIn gets ready to move into China) is rewarding patient investors.

Facebook, however, appears to be ignoring its competencies in favor of a host of unhappy new customers already afraid of future alterations to their app. No golden eggs are evident, and the wrong move will kill the goose anyway.


Tyler Lacoma has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. 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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