Sci-Tech and Business

How Will WhatsApp Coexist With a Company Whose Business It Hates?

By Sabuj Mia, London

In recent weeks Facebook (FB) has been talking up the strategy it hopes will help keep it from fading into obsolescence during its second decade. In earnings calls and profiles in prestigious business publications, Mark Zuckerberg has talked about the value of services that are part of the company but also stand on their own. A best-case scenario could be a sort of General Electric of the Internet, where self-reinforcing brands add up to something greater than the sum of their parts; a worse outcome would resemble the tribal warfare of post-Soviet Afghanistan, or Microsoft under Steve Ballmer.

On Wednesday, Facebook took its boldest step yet in this direction, acquiring WhatsApp for $19 billion in cash and stock. This is a lot of money even in the San Francisco area, and there have been various reasons given for why Zuckerberg interrupted his Valentine’s Day and dedicated 10 percent of the value of his company to acquiring a mobile messaging service with a credo—”No ads, no gimmicks, no games”—that is anathema to Facebook’s own.

There’s the scary competitor theory, where Facebook buys off companies that it can’t compete with to get them off the market. At $19 billion per, this tactic doesn’t scale. The pied piper theory, where Facebook will pay anything for the flute playing the tune that gets teenagers (and especially foreign teenagers) marching, has more credence. WhatsApp has 450 million users, and is certainly outpacing Facebook in key international markets. In India, 55 percent of respondents to a survey by mobile technology platform Jana said WhatsApp was their most-used messaging service, compared with just 0.85 percent for Facebook. Large majorities of Internet users in Brazil and Mexico also said WhatsApp was their favorite messaging app, with Facebook lagging far behind.

VIDEO: Why WhatsApp Makes Perfect Sense for Facebook

Facebook has bought users in the past, most notably in the now cheap-seeming $1 billion deal for Instagram. Such connections can make sense, with the smaller service gaining access to Facebook’s infrastructure and resources, and Facebook getting a chance to reach an audience it has trouble connecting with on its own. On the other hand, each of these deals should presumably help Facebook with at least one side of its major business, which is turning data into advertising revenue. The company either needs to get more data or needs a new market for ads. Here, WhatsApp seems like a mismatch.

Facebook-owned companies don’t have to become part of Facebook’s core service. WhatsApp has made it clear that it has no plans to be swallowed, referring to the acquisition only as a “partnership” on its blog. Fine. Instagram still exists as a separate service. But the real cognitive dissonance from this deal comes from WhatsApp’s extreme rejection of advertising as a way to make money. The home page of its website has two sections, one describing how the service works and the other decrying advertising, quoting Tyler Durden from Fight Club: “Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.” Nor does WhatsApp collect any demographic information about its users. These are exactly the things Facebook could help it with.

WhatsApp can prove its worth by coming up with some novel, non-ad-based way to profit from its enormous user base. But there’s nothing obvious about its alliance with Facebook that will make that any easier. Meanwhile, the wasted opportunity to mine user data to target ads must be a bitter pill for Zuckerberg to swallow. For now, at least, he’s going along with it, saying that he doesn’t think advertising is a good way to make money from mobile messaging. It would be embarrassing to change tack at this point, and would likely alienate users. It must also be incredibly tempting.

Source: BusinessWeek