You’ve surely heard by now: Facebook announced on Wednesday that it would be acquiring mobile messaging company WhatsApp for $16 billion, consisting of $4 billion in cash and $12 billion in stocks. (FYI, if you’ve heard $19 billion, the extra three comes from additional stocks that’ll be added to the deal over a period of four years.) Like most Facebook moves, this one was not without controversy as analysts, users, and Wall Street all chimed in with their two cents. Here’s a rundown of the biggest pros and cons of the pricey purchase.
PRO: In a call with investors, Mark Zuckerberg explained that WhatsApp is extremely valuable to Facebook because of its potential to build connectivity throughout the world. With 450 million users, WhatsApp is popular across Europe and Asia, and plays a particularly crucial role in countries with growing, emerging economies. According to Mashable, Zuckerberg also expressed that buying WhatsApp will help Facebook cultivate its Internet.org project, which aims to give the two-thirds of the world not yet connected to the Internet a way to get online. “Since most of [the] growth is expected in the developing markets where WhatsApp is popular, WhatsApp appears to have been suddenly elevated to a key component of that strategy,” Mashables, Pete Pachal writes.
CON: Despite Zuckerberg’s convincing argument, the market didn’t respond positively to the acquisition news, which sent Facebook shares down 3.7 percent in premarket trading. ”This is crazy money. I think they massively overpaid for this. They’ve done it because they are desperate. They are so worried that they are bleeding users that they are trying to get their user count up by buying companies that have users. But that reminds me so much of some of the strategies of the dotcom era, it’s actually giving me chills,” Rob Enderle, principal analyst at Enderle Group, told CNBC.
PRO: While $16 billion is a hefty sum to pay, the math is actually pretty reasonable when you look at the price per acquired users. Facebook’s purchase of Instagram, which had about 33 million users at the time, cost them roughly $30 per user. WhatsApp, with 450 million users, is costing about $42 per user. For comparison, Snapchat, which Facebook tried to buy last year, trades at about $50 per user. ”We don’t think the company overpaid for WhatsApp,” Robert Peck, analyst at SunTrust Robinson Humphrey, told CNNMoney. ”We think WhatsApp and Facebook were likely to more closely resemble each other over time, potentially creating noteworthy competition, which can now be avoided.”
CON: One of the biggest concerns among WhatsApp skeptics has been the fact that the company isn’t reaching its full potential by adopting a very modest monetization strategy. The app is completely free for the first year of use, and then charges users $1 per year, every year. The company doesn’t have any plans to draw revenue from advertisements, either. “On the surface, Facebook is acquiring the global mobile messaging leader, which is a valuable asset in terms of monetization opportunity. However, while we respect WhatsApp’s position of focusing in the near term on user growth and engagement and not monetization, the experience of other similar messaging apps like WeChat, Kakaotalk and LINE suggest significant revenue opportunities in areas like games, stamps/stickers and payments/m-commerce,” Citi analyst Mark May told CNBC. WhatsApp’s reluctance to monetize more effectively could prove problematic for Facebook and the company’s high hopes for the app.
PRO: “While Facebook previously had a reputation for crunching up and assimilating its purchases with Borg-like efficiency, the company’s previous record purchase Instagram shows a key change of tactic,” writes Forbes’ Gordon Kelly. Indeed, Facebook surprised industry thought leaders when it didn’t swallow and rebrand Instagram under it’s own photo sharing functionality, but instead left the photo sharing site alone to “do its thing,” so to speak. “Instagram users love Instragram because it isn’t Facebook,” Kelly writes, and the same is true for WhatsApp. Zuckerberg has already made clear that WhatsApp won’t become simply an extension of Facebook Messenger, and that’s good news. Facebook is better off as a conglomerate and it looks like they’ve finally realized it.
CON: Another downside to WhatsApp–and similar apps for that matter–is that their popularity is likely going to be a temporary phenomenon. Right now, WhatsApp is big because it offers a cheap alternative to mobile data and messaging plans, especially in areas where smartphone use isn’t mainstream and SMS costs are sky high. WhatsApp will continue to grow until it hits a critical peak, a point at which mobile service providers will start seriously worrying about the competition and rethink their own strategies. With more people turning to alternative messaging services, it’s only a matter of time before big players in the mobile space make a major change. Just look at what happened to cell phone contracts–as pay-as-you-go options became increasingly popular, even Verizon, known for its notoriously strict 2-year contracts, caved and unveiled a $35 prepaid phone plan. WhatsApp and others like it will remain popular until data and messaging plans get cheaper, and it’s just a matter of time before they do.
THE VERDICT: Only time will tell whether the ambitious investment in WhatsApp will pay off. For now, one thing is clear: Facebook is getting nervous. “Facebook wants to be the single point of communication that people use to stay connected to friends and family. With 450M users, WhatsApp challenged that goal,” Alan Lepofsky, vice president and principal analyst at Constellation Research told me in an email. “By combining the two, Facebook ensures it still has access to all those people and their social graph.”