Facebook’s purchase this February of chat messaging startup WhatsApp for $19 billion puzzled many observers. Why is WhatsApp – a fairly basic messaging application – worth so much to Facebook? Do personal information assets have anything to do with it?
Facebook’s purchase this February of chat messaging startup WhatsApp made business headlines across the world. The purchase price of $19 billion – amounting to $42 for each of What’sApp’s 450 million users – is insanely high for a startup with only 55 employees, and many multiples of Facebook’s reported $3 billion bid for Snapchat last year. There has been a great deal of speculation about why WhatsApp is so valuable to Facebook. The WhatsApp buyout is clearly not about intellectual property. WhatsApp is a very basic application: it sends text messages, photos, and videos. These software capabilities are not even patented. Facebook could easily develop and market a similar application. So let’s look at some other possible reasons for such a major investment.
Dominating the Global Text Messaging Market
WhatsApp indisputably offers Facebook new possibilities for market penetration. WhatsApp has a strong presence in markets where Facebook is seeking to expand, such as Europe, Latin America, and India, and is currently adding up to a million new users a day. WhatsApp positions itself as a cheaper alternative to SMS, and it may well be able to overtake SMS as leader in the global text messaging market. In a public statement, Mark Zuckerberg said that his current goal for WhatsApp was to expand to a user base of billions, and then to focus on ways to monetize the service. What might these be?
The most obvious option for monetizing WhatsApp is advertising. WhatsApp founder Jan Koum insists that despite the Facebook buyout, WhatsApp will never include advertisements or collect personal information for the purpose of targeted advertising. In the WhatsApp blog, he claims, “Respect for your privacy is coded into our DNA, and we built WhatsApp around the goal of knowing as little about you as possible.” The only personal information stored by WhatsApp is phone numbers, address books, messages, and status updates.
However, this data could be incredibly useful to Facebook. One of the major barriers to Facebook’s targeted advertising is the existence of millions of fake user accounts. Fake accounts interfere with Facebook’s attempts to target advertising to users’ age, gender, profession, place of residence, and so forth. Since most individuals have only one cell phone, by accessing the phone numbers of WhatsApp users who also use Facebook, the company could figure out which Facebook accounts belong to the same individual. This way, advertisers would not waste their money by paying to show ads to the same individual multiple times. Cell phone numbers are tied to individuals’ real locations, which would also help Facebook better to target ads. Further, WhatsApp users are usually listed in their friends’ address books by their real names, which can be used to determine which Facebook accounts contain genuine personal information. All of this makes for more profitable advertising opportunities, for which advertisers would likely be willing to pay a premium.
Facebook and Privacy
Would Facebook do this? Koum has assured users that WhatsApp’s acquisition by Facebook will not affect their privacy settings and that user data will not be shared between the two services. Still, Facebook’s privacy record does not inspire confidence in this promise. Facebook has changed their privacy settings without user consent on several occasions, always in the direction of making more information public. Facebook has recently been under fire for sharing information with the US National Security Agency (NSA); when this practice came to public attention, Zuckerberg played to the media by calling President Barack Obama to voice his displeasure with NSA spying, rather than owning up to the fact that Facebook had been actively helping the government to collect data. Perhaps Zuckerberg’s most honest statement about privacy is his speech at the Crunchie awards in San Francisco, in which he said that privacy is no longer a “social norm.” Facebook’s business model is centered on people trusting them with their personal information, but their actions make it clear that privacy is not a priority. WhatsApp users would be wise to keep this in mind now that Facebook owns this service as well.
Bobbie Johnson, “Privacy no longer a social norm, says Facebook founder,” The Guardian, January 11, 2010.
“How WhatsApp buyout will help Facebook in India,” The Times of India, February 20, 2014.
Jan Koum, “Setting the record straight,” WhatsApp blog, March 17, 2014.
Robert McMillan, “Zuckerberg phones Obama for answers about NSA spying,” Wired Enterprise, March 13, 2014.