1. Facebook aquires
WhatsApp for $19 billion
31-Aug-14
Afzal Usmani
Aditya Suiwal
Debanshu Mukherjee
Dheeraj Rai
Deekshant Singhania
Himanshu Runwal

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Contents
Introduction ............................................................................................................................................3
Life History- Jan Koum and Brian Acton ...................................................................................................5
How WhatsApp Started ...........................................................................................................................7
Early Challenges Faced ............................................................................................................................9
Tracking Growth Of WhatsApp ................................................................................................................9
Acquiring offers made by other companies............................................................................................10
Facebook’s offer and negotiations.........................................................................................................11
Facebook’s perspective .........................................................................................................................19
Conclusion.............................................................................................................................................23
Reference..............................................................................................................................................24

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Introduction
Since its priciest acquisition of Instagram,
Facebook purchased the fast growing
mobile messaging startup WhatsApp for
$19 billion in cash and stock on 19th
February 2014, as Facebook looks to
increase its customer base especially
keeping younger population in mind.
WhatsApp will receive $12bn in Facebook shares $4bn in cash and an additional $3bn in
restricted shares that will be paid out to executives at a later date. It is widely believed that
Facebook with this move is strongly focusing on the mobile messaging platform and with 450
million customer base to work with it should be able to convince the investors of its strategy for
mobile platform. The massive acquisition - Facebook’s largest ever - comes as tech firms are
fighting to build their mobile businesses. WhatsApp is particularly big in Europe and Latin
America where its market penetration is thought to top 80% in countries including Brazil,
Germany, Portugal and Spain. It is reported that WhatsApp registers around 1 million new users
every day.
The successful bid comes after Google reportedly made a $1 billion offer for the company last
year. Facebook has been trying to break into mobile messaging platform for the past couple of
years. In 2013 Facebook made an unsuccessful $3bn bid for SnapChat, a service that sends
messages that erase themselves after a short period. The social media firm is making the move as
WeChat, owned by China’s Tencent, is rapidly building its service in the west. Facebook faltered
after its share sale in May 2012 as analysts worried the company was losing out as its users
moved to mobile. It has since recovered and has concentrating on building up its mobile
business. But the company has also warned that teenagers are cooling on its service.
Global smartphone shipments are on the rise and totaled roughly 968 million for 2013.
Smartphone salesjumped 36% in Q4 2013 and constituted roughly 57.6% of total mobile phone
sales as compared to 44% during the same period a year ago. Developing economies including
Latin America, the Middle East and Africa, Asia-Pacific and Eastern Europe saw their
smartphones sales surge by over 50% during the fourth quarter, contributing most to the global

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growth. IDC forecasts smartphone shipments to grow to 2.3 billion by 2017 and, as we saw in
the fourth quarter of 2013, much of this growth will come from emerging markets.
Emerging countries include over 85% of the world population, and contribute almost three
quarters of global GDP growth, according to Fidelity Investment Ltd. Unlike developed
countries where smartphone penetration is above 50%, it is below 25% in many developing
countries. While the majority of the population in these countries is below the poverty line, the
elite and aspiring middle class make up nearly 20% of the population. However, as economic
development gains traction in these countries, many households are expected to move to the
higher income bracket in the future, increasing the demand for smartphones. While the adoption
of smartphones in developed countries fueled the first wave of global growth, strong demand in
emerging markets, especially Brazil, Russia, India and China, will drive the next phase.
As smartphone usage continues
to grow, mobile Internet
messaging will gradually
replace SMS texts and will
become an indispensable
service. Facebook Messenger
hasn’t seen much success and
the company believes that
separating messaging feature
from the main app will
essential force users to use its
messaging app. We believe that mobile messaging is here to stay, even though the growth in
social networking industry might slow down. This is because mobile messaging enables a very
basic human need to communicate with family and friends day-to-day in a convenient manner. In
some ways, Facebook has acknowledged a weakness in its business as it looks into the future and
is attempting to plug the gap by strengthening its position in mobile messaging market.
Whatsapp’s acquisition was another move in this regard. The company’s multi-app strategy is
aimed at capturing different niches of mobile market, thereby opening up new growth
opportunities and reducing risk. Facebook has seen a consistent increase in its customer base

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over the years as shown in the insert.
Working culture in both these companies is different especially the Business Model for both the
companies. WhatsApp has a no add policy. On the contrary they charge a subscription fees $0.99
USD per year from the user. Facebook on the contrary relies on the old business model: display
ads. Display ads hurt the user experience, and also are not very efficient in producing revenues.
Estimates put Google’s search revenues per pageviews at 100-200 times that of Facebook’s. It is
also important to know that ads work only when the customer has purchasing intent.
With contrasting philosophies it was very interesting that WhatsApp agreed to the deal. In this
report we look at the carious other options WhatsApp had for growth and analyze the present
deal from both WhatsApp as well as Facebook’s perspective.
Life History- Jan Koum and Brian Acton
Facebook has a habit of turning low-profile CEOs into overnight celebrities. First it was Kevin
Systrom, the Instagram head who was instantly the talk of the tech world when Facebook offered
$1 billion for his 13-employee startup in April 2012. Today it’s Jan Koum, who just sold his
mobile messaging platform WhatsApp to Facebook for $19 billion in cash and stock. Koum had
been a relatively low-key CEO, giving few media interviews as his messaging service quietly
grew even faster than Facebook had. But now that he’s at the center of the largest acquisition
ever for a venture-backed startup, he’ll no doubt become a figure in the public sphere.
Koum, who Forbes believes owns 45% of WhatsApp and thus is suddenly worth $6.8 billion (net
of taxes) — was born and raised in a small village outside of Kiev, Ukraine, the only child of a
housewife and a construction manager who built hospitals and schools. His house had no hot
water, and his parents rarely talked on the phone in case it was tapped by the state. It sounds bad,
but Koum still pines for the rural life he once lived, and it’s one of the main reasons he’s so
vehemently against the hurly-burly of advertising.
At 16, Koum and his mother immigrated to Mountain View, a result of the troubling political
and anti-Semitic environment, and got a small two-bedroom apartment though government
assistance. She took up babysitting and Koum swept the floor of a grocery store to help make
ends meet.

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Koum was a troublemaker at school but by 18 had also taught himself computer networking by
purchasing manuals from a used book store and returning them when he was done. After that He
enrolled at San Jose State University and moonlighted at Ernst & Young as a security tester. In
1997, he found himself sitting across a desk from Acton, Yahoo employee 44, to inspect the
company’s advertising system.
Six months later Koum interviewed at Yahoo and got a job as an infrastructure engineer. Over
the next nine years the pair also watched Yahoo go through multiple ups and downs. Acton
invested in the dotcom boom, and lost millions in the 2000 bust.
Brian Acton got his start in the high-tech world more than two decades ago as a computer whiz
kid in Central Florida. At Lake Howell High School, he helped his school math and computer
teams win statewide championships. Amid his honors and awards, however, he showed little
interest in the money side of technology and no hint of the business savvy that would eventually
lead him to the tech center of the world. As a Lake Howell senior, he earned some dual-
enrollment credits at the University of Central Florida and landed a full scholarship to study
engineering at the University of Pennsylvania. After one year, he transferred to Stanford
University to study computer science.
After stints with Adobe Systems and Apple, Acton joined the first wave of hires at Yahoo in
1995. It was there he met Koum, and they became friends.
As Yahoo's vice president of engineering in 2008, Acton said he "sort of retired to take some
time off and decompress." In the early going of WhatsApp, Acton and Koum were bypassed by
many venture capitalists, finally securing a deal with Sequoia Capital, which now stands to reap
several billion dollars from its investment. Acton credited his mother with giving him the
inspiration to help launch WhatsApp.
"My mom started an air-freight company; my grandmother built a golf course," he said. "I have a
certain degree of entrepreneurial risk-taking in my family history. Maybe that eventually rubbed
off on me a little bit."
In September 2007 Koum and Acton finally left Yahoo and took a year to decompress, traveling
around South America and playing ultimate frisbee. Both applied, and failed, to work at

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Facebook. They are part of the Facebook reject club, according to Acton. Koum was eating into
his $400,000 in savings from Yahoo, and drifting.
Then in January 2009, he bought an iPhone and realized that the seven-month old App Store was
about to spawn a whole new industry of apps. He visited the home of Alex Fishman, a Russian
friend, The two of them stood for hours talking about Koum’s idea for an app over tea at
Fishman’s kitchen counter.
Koum almost immediately chose the name WhatsApp because it sounded like “what’s up,” and a
week later on his birthday, Feb. 24, 2009, he incorporated WhatsApp Inc. in California. By early
2011 WhatsApp was squarely in the top 20 of all apps in the U.S. App Store.Two years later in
Feb. 2013, when WhatsApp’s user base had swelled to about 200 million active users and its
staff to 50, Acton and Koum agreed it was time to raise some more money.
How WhatsApp Started
During 1997, Koum had enrolled at San Jose State University and moonlighted at Ernst &
Young as a security tester. One fine day he found himself sitting across a desk from Acton,
Yahoo employee 44, to inspect the company’s advertising system. They both liked each other’s
no-nonsense style of doing work. Six months later Koum interviewed at Yahoo and got a job as
an infrastructure engineer.
When Koum’s mother died of cancer in 2000 the young Ukrainian was suddenly alone; his father
had died in 1997. He credits Acton with reaching out and offering support. “He would invite me
to his house,” Koum remembers. The two went skiing and played soccer and ultimate Frisbee.
Over the next nine years the pair also watched Yahoo go through multiple ups and downs. Acton
invested in the dotcom boom, and lost millions in the 2000 bust. For all of his distaste for
advertising now he was also deep in it back then, getting pulled in to help launch Yahoo’s
important and much-delayed advertising platform Project Panama in 2006. By this time, both
Koum and Acton had gotten unenthusiastic about their work at yahoo.
In September 2007 Koum and Acton finally left Yahoo and took a year to decompress, traveling
around South America and playing ultimate frisbee. Both applied, and failed, to work at

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Facebook. In January 2009, Koum bought an iPhone and realized that the seven-month old App
Store was about to spawn a whole new industry of apps. Koum visited the home of Alex
Fishman, a Russian friend, and the two of them stood for hours talking about Koum’s idea for an
app over tea at Fishman’s kitchen counter.
“Jan was showing me his address book,” recalls Fishman. “His thinking was it would be really
cool to have statuses next to individual names of the people.” The statuses would show if you
were on a call, your battery was low, or you were at the gym. Koum could do the backend, but he
needed an iPhone developer, so Fishman introduced Koum to Igor Solomennikov, a developer in
Russia that he’d found on RentACoder.com. Koum almost immediately chose the name
WhatsApp because it sounded like “what’s up,” and a week later on his birthday, Feb. 24, 2009,
he incorporated WhatsApp Inc. in California.
Help came from Apple when it launched push notifications in June 2009, letting developers ping
users when they weren’t using an app. Jan updated WhatsApp so that each time you changed
your status — “Can’t talk, I’m at the gym” — it would ping everyone in your network. Jan
watched the changing statuses on a Mac Mini at his town house in Santa Clara, and realized he’d
inadvertently created a messaging service. “Being able to reach somebody half way across the
world instantly, on a device that is always with you, was powerful,” says Koum.
The only other free texting service around at the time was BlackBerry’s BBM, but that only
worked among BlackBerries. There was Google’s G-Talk and Skype, but WhatsApp was unique
in that the login was your own phone number. Koum released WhatsApp 2.0 with a messaging
component and watched his active users suddenly swell to 250,000.
After Koum met him, Acton realized he was looking at a potentially richer SMS experience –
and more effective than the so-called MMS messages for sending photos and other media that
often didn’t work. He and Koum worked out of the Red Rock Cafe, a watering hole for startup
founders on the corner of California and Bryant in Mountain View. The two were often up there,
Acton scribbling notes and Koum typing. In October Acton got five ex-Yahoo friends to invest
$250,000 in seed funding, and as a result was granted cofounder status and a stake. He officially
joined on Nov. 1.

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With Android just a blip on the radar, Koum hired an old friend who lived in LA, Chris Peiffer to
make the BlackBerry version of WhatsApp. Through their Yahoo network they found a
startup subleasing some cubicles on a converted warehouse on Evelyn Ave. Even then there was
no WhatsApp sign for the office.
Early Challenges Faced
Early WhatsApp kept crashing or getting stuck. Over ribs at Tony Roma’s in San Jose, Fishman
went over the problems and Koum took notes in one of the Soviet-era notebooks he’d brought
over years before and saved for important projects. The following month after a game of ultimate
frisbee with Acton, Koum grudgingly admitted he should probably fold up and start looking for a
job. Acton balked. “You’d be an idiot to quit now,” he said. “Give it a few more months.”
With Koum and Acton working for free for the first few years, their biggest early cost was
sending verification texts to users. Koum and Acton were using cutthroat SMS brokers like
Click-A-Tell, who’d send an SMS to the U.S. for 2 cents, but to the Middle East for 65
cents. The costs were high enough to drain Koum’s bank account. Fortunately WhatsApp was
gradually bringing in revenue, roughly $5,000 a month by early 2010 and enough to cover the
costs then. The founders occasionally switched the app from “free” to “paid” so they wouldn’t
grow too fast. In Dec. 2009 they updated WhatsApp for the iPhone to send photos, and were
shocked to see user growth increasing even when it had the $1 price tag. “You know, I think we
can actually stay paid,” Acton told Koum.
Tracking Growth Of WhatsApp
By early 2011 WhatsApp was squarely in the top 20 of all apps in the U.S. App Store. During a
dim sum lunch with staff, someone asked Koum why he wasn’t crowing to the press about it.
“Marketing and press kicks up dust,” Koum replied. “It gets in your eye, and then you’re not
focusing on the product.”
Venture capitalists didn’t need the press to tell them WhatsApp was going viral. Koum and
Acton were batting away all requests to talk. Acton saw VC funding as a bailout. But Sequoia
partner Jim Goetz was persistent, spending eight months working his contacts to get either
founder to engage. He’d met with a dozen other companies in the messaging space like Pinger,

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Tango and Baluga, but it was clear WhatsApp was the leader. He eventually sat down with
Koum and Acton at the Red Rock Cafe, answered a “barrage” of their questions and promised
not to push advertising models on them but act as a strategic advisor. They eventually agreed to
take $8 million from Sequoia on top of their $250,000 seed funding.
Two years later in Feb. 2013, when WhatsApp’s user base had swelled to about 200 million
active users and its staff to 50, Acton and Koum agreed it was time to raise some more
money. They decided to hold a second funding round, in secret. Sequoia would invest another
$50 million, valuing WhatsApp at $1.5 billion.
Acquiring offers made by other companies
Google
Google is reported to have offered to buy WhatsApp in a last-ditch attempt for more than $19
billion, but was refused by the WhatsApp co-founders.
Jan Koum and Brian Acton are said to have turned down Google's offer in the belief the
company was only interested in obtaining WhatsApp to keep it out of Facebook's hands.
The Information has reported that Google CEO Larry Page met with Koum a few days after
Mark Zuckerberg had pitched to purchase WhatsApp and for Koum to join his board of directors.
Page supposedly told Koum to stay independent, as WhatsApp was "a big threat to Facebook". A
source claiming to be involved in the deal said Page mentioned how joining Facebook would
have a major impact on "how things play out for years to come".
Another speculated reason WhatsApp declined Google's offer is that Koum was not offered a
seat on its board of directors, unlike Facebook.
Earlier Google approached WhatsApp with an odd offer: It would pay the mobile messaging
startup in exchange for the right to be notified if the messaging app entered into acquisition talks
with other companies, according to a person involved in the process and two people briefed on it.
MICROSOFT
And Gates said Microsoft also would have snapped it up given the chance but wouldn't have
outbid Zuckerberg. Gates explains:

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Microsoft would have been willing to buy it, too “I don't know for $19 billion, but the company's
extremely valuable.”
Unfortunately, this comment came very late in May 2014 after facebook had already acquired
whatsapp.
Facebook’s offer and negotiations
The subject line of the e-mail was like every other come-on that hit Jan Koum’s in-box in the
spring of 2012. He was pounded daily by investors who wanted a piece of his company,
WhatsApp. Hatched on his birthday, Feb. 24, 2009, WhatsApp was emerging as a global
phenomenon. Some 90 million people were using it to text and send photos for free. No social
utility had ever grown as fast. Facebook had only 60 million by its third birthday. And at the time
close to half of WhatsApp users were returning daily.
Koum looked at the e-mail sender: Mark Zuckerberg. Now, that was a first. The Facebook
founder had been using WhatsApp and wanted him over for dinner. Koum stalled, then finally
wrote back saying he was traveling soon and DEALING with server issues. Zuckerberg
suggested they meet before Koum left. Koum forwarded the reply to his cofounder, Brian Acton,
and his sole venture backer, Jim Goetz, a partner at Sequoia Capital, adding the word:
“Persistent!”
Take the meeting, Acton said: “When someone of Mark’s status contacts you directly, you
answer the phone.” Koum had lunch with Zuckerberg later that month at Esther’s German
Bakery, chosen for its discreet back patio and location 20 miles away from Facebook’s campus.
Over their meal Zuckerberg said he admired what Koum had built and hinted at his interest in
combining their two firms.
So began the most lucrative two-year courtship in technology history, one in which admiration
led to friendship and then, in a last-minute hurry, to an unprecedented transfer of wealth, all
signed and sealed on the door of the welfare office Koum, 38, once. Facebook bought
WhatsApp. The deal cements Zuckerberg as tech’s new billionaire-maker. Koum, a shy but

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brilliant engineer who moved from Ukraine to the U.S. with nothing, will join the Facebook
board and, after taxes, pocket $6.8 billion.
His cofounder, Brian Acton, a mild-mannered 42-year-old ex-Yahoo engineer who got turned
down for jobs at Twitter and Facebook, will come away with $3 billion after tax. The deal, he
says, has left him “astonished.” Sequoia Capital, the only venture firm to taste a part of this deal,
walks away with $3.5 billion–a 60-fold return on its $58 million investment.
The numbers are crazy for a company with only 56 employees and roughly $20 million in
revenue, but it made sense for Facebook. WhatsApp, which doesn’t even have a sign on the door
of its headquarters in Mountain View, is one of the world’s most commonly used communication
utilities after e-mail and the telephone and will introduce voice calling later this year.
Its 470 million users have already erased $33 billion in SMS revenue from wireless carriers that
got rich and fat charging per text. WhatsApp charges nothing for the first year and then asks you
to pay $1 a year thereafter. No ads, no stickers, no premium upgrades. In later discussions
Zuckerberg promised the WhatsApp founders “zero pressure” to make money, saying, “I would
love for you guys to connect 4 to 5 billion people in the next five years.”
WhatsApp could eventually make Zuck a lot of money. It costs WhatsApp five cents to support
each user, and it’s charging customers in only a handful of countries, like the U.S. and Britain,
where mobile payments are relatively mature. WhatsApp believes $1 billion in annual revenue is
within reach by 2017 as the service grows and billing falls into place. Insiders say the app could
also start charging airlines or companies like Uber for the right to send messages to WhatsApp
users with their permission.
The big risk, as always, is a mass exodus of users to the next new thing. That doesn’t seem
likely right now. WhatsApp, Acton confirms, has been signing up a million new users per
day since Dec. 1, 2013.

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Pretty much everyone in Hong Kong with a smartphone uses WhatsApp. In United
Arab Emirates you can watch WhatsApp Academy on TV. In the Netherlands, where 9.5
million people (more than half the population) actively use it, “Whatsappen” is now a verb in
the Dutch dictionary, meaning to send a WhatsApp message. Brazil’s professional soccer
players use its group-chat feature to organize labor strikes during games.
“Sometime in the not too distant future,” says Sequoia’s Goetz, “WhatsApp is likely to eclipse
all SMS traffic across the globe.” (Perhaps it’s no surprise that Zuckerberg reportedly held a
private meeting with 20 telecom executives last week to ease their fears of being buried by free
web-based services like Facebook and WhatsApp.)
Back in 2012, before all the craziness, Koum had time to mull over his lunch with Zuckerberg.
He and Acton had $8 million from Sequoia and wanted nothing more than their independence.
They rarely went to Silicon Valley networking events and didn’t entertain bid offers. So
Facebook’s overtures from then on never turned into bids on paper. Zuckerberg and Koum
instead became friends, meeting once a month or so for dinner.
For the next year WhatsApp focused on its march past 300 million users. In June mid-2013 the
founders happened to meet Sundar Pichai, who oversees Android and Chrome at Google. They
talked about their love of clean and simple digital products. At some point around early 2014

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Pichai decided it would be good for Koum and Acton to meet his CEO, Larry Page. They agreed
to meet on Tuesday, Feb. 11.
On the Friday before that meeting a WhatsApp staffer ran into Facebook’s head of business
development, Amin Zoufonoun, and told him that Koum was meeting with Page imminently.
Zoufonoun, who helped broker Facebook’s $1 billion Instagram acquisition in April 2012, went
back to his company and set the wheels in motion to accelerate an acquisition offer that had
already been in the works for some time.
Zuckerberg got Koum over to his house Monday night and finally floated the idea of an
acquisition that would leave WhatsApp independent and crucially, make Koum a board member
of Facebook. “It was a partnership, where I would help him make decisions about the company,”
Koum recalls. “The combination of everything that was discussed is what made it very
interesting for us.”
The next day Koum and Acton drove to Google’s Mountain View headquarters and met with
Page and Pichai in one of the company’s gleaming conference rooms. They talked for an hour
about the world of mobile and WhatsApp’s goals. “It was a pleasant conversation,” says Koum.
Page, he adds, is “a smart guy.”
When asked if he got the impression Page was interested in buying WhatsApp, Koum pauses.
“No,” he says. Maybe there was a hint? “Maybe I’m not good at reading him.”
If Page had been interested in buying WhatsApp as some reports have recently suggested, the
meeting might have been too little too late. Things had already been set in motion at Menlo Park,
and at WhatsApp the founders and their advisors were calculating how much they could
conceivably ask for in deal talks. One source close to the company says WhatsApp’s founders
were more interested in independence than money, but another says they also believed
themselves to be worth at least $20 billion, a number calculated by looking at
the market capitalization of Twitter (currently $30 billion), WhatsApp’s global user base and the
company’s future plans for monetization.
On Thursday Koum and Acton went to Zuckerberg’s house for dinner at 7 p.m., where Acton
met Zuckerberg for the first time.

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“One day I want you to become bigger than us in number of users,” Zuckerberg told them.
“What you guys do is a much more common-use case.” Zuckerberg said he wanted them to keep
doing what they were doing but with the might of Facebook’s legal, financial and engineering
resources.
At 9 p.m. Acton went home to tend to his young family. Koum and Zuckerberg played high-
stakes poker: One source says that Zuckerberg Offered a range of $15 billion and higher, and
that Koum said he was looking for something closer to $20 billion. Facebook’s founder asked for
some time.
The following day, Friday, Feb. 14, Koum and Acton posed for a photo shoot with FORBES at
their Mountain View office. When the photographer left at 6:30 p.m., Koum got in his Porsche
and stopped at Zuckerberg’s house for another meeting. Koum denies a report that he interrupted
the Zuckerbergs’ Valentine’s Day meal. “It wasn’t like there was dinner and candlelight and I
barged in through the door.”
Until then he had tended to leave the Zuckerbergs’ house when Mark’s wife, Priscilla Chan,
came home from work. Over snacks Koum and Zuckerberg hammered out the final details of the
partnership and WhatsApp’s all-important independence under Facebook, but the two weren’t
yet in agreement.
Finally, on Saturday night Koum and Zuckerberg went from talking in the kitchen to the living
room couch, before Zuckerberg offered $19 billion as well as deal terms that Koum liked. It was
“something we can probably do on our end,” Koum replied.
Koum waited for Zuckerberg to leave the room and got on the phone to Acton, who was at home.
It was around 9 p.m. “I just want to check if you’ve made a decision either way,” Koum said,
giving his friend the finalized details. “Do you want to move forward?”
“I like Mark,” Acton replied. “We can work together. Let’s make this deal.”
Koum walked out of the room and found Zuckerberg. “I just talked to Brian,” Koum said. “He
thinks we should work together and that you’re a good guy and we should do it.”

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The two of them shook hands and then hugged. Zuckerberg remarked it was “f–king exciting,”
and whipped out a bottle of Johnnie Walker Blue Label, which he knew was Koum’s favorite
Scotch. They each called their business-development directors to come over and finalize the
process. About an hour later Koum drove home in his Porsche and went to bed.
Lawyers and bankers raced through the weekend to get deal papers to sign by Wednesday
morning before everyone broke for the annual Mobile World Congress in Barcelona. Rather than
signing them at WhatsApp’s headquarters, they drove two blocks, at Jim Goetz’s suggestion, to
101 Moffett Boulevard, the abandoned building where Koum once collected food stamps as a
teenager. Koum signed them on the main door.
When they got back to the office, Koum sent a WhatsApp message to “All WhatsApp,” the chat
group for company employees, and called them into the conference room for a 2pm meeting.
“Look, here’s what’s happening,” he said after everyone had piled into the room. “We’re
merging with Facebook.” Koum and Acton told their shocked employees they would be okay
and still operate on their own. At 2.30 p.m. the conference-room door opened again and in
walked Mark Zuckerberg. He spoke briefly with WhatsApp’s small staff and shook hands. After
a conference call with investors, Koum got back to work.
“We still have a company to run,” he says matter-of-factly.
Now it’s down to Zuckerberg and Koum to figure out how to make WhatsApp worth the $19
billion Facebook just paid for it. The first move is to make sure the app keeps working. The
Saturday after the deal was announced people around the world slammed WhatsApp’s servers
with new sign-ups. The app suffered a four-hour outage. The timing was coincidental, according
to Acton, but nonetheless bad for a startup that prides itself on reliability.
Koum and Acton are so fixated on uptime that no one is allowed to talk to WhatsApp’s server
guys in the months before Christmas as they prepare for the message deluge. Visitors are rarely
allowed into the office, lest they be a distraction. A whiteboard in the office shows the number of
days since the last outage or incident, as a factory might show a tally for injuries or deaths.

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“A single message is like your firstborn child,” says Acton, a new parent himself. “We can never
drop a message.” He pulls up a photo of his late stepfather, sent to his phone in April 2012. “This
is why I hate Snapchat,” where photos and messages disappear after viewing.
WhatsApp’s success boils down to a couple of technical advantages: Koum made it one of the
first mobile apps to sync with a phone’s contacts. After he got fed up with forgetting his Skype
user name and password, he went through the painstaking process of phone-number
normalization for WhatsApp, ditching logins and passwords to make his service as simple as
sending an SMS. The numbers on your phone are “your real life network,” he says.
Koum and Acton also picked up years of experience at Yahoo in building networks to scale,
servers that could handle hundreds of millions of people’s data without buckling. They knew to
restrain their user growth in the early days where other startups would have ramped up.
“Instead of the standard mentality of ‘get big fast…’” says Acton. “We took a different
approach,” Koum adds. Instead of Amazon cloud services, WhatsApp also uses dedicated
servers that run on niche operating systems like Erlang, built for telecommunications, and
FreeBSD, an older alternative to the more-popular Linux, that is dedicated to servers. It
gives them a tighter control on infrastructure.
WhatsApp’s speed and deceptively simple interface could see it permanently trump its peers in
the same way Facebook beat out rivals MySpace and Orkut, but its old-fashioned business model
is unusual. Though other messaging apps like China’s WeChat, South Korea’s KakaoTalk and
Canada’s Kik significantly trail WhatsApp in active users, they’re free and they sell ads, games
and digital stickers that have seen them book heftier revenues.
WeChat, owned by state-backed Tencent and billionaire Ma Huateng, is letting some of its 270
million active users buy snacks in vending machines in the Beijing subway as an e-payments
experiment. Analysts at Barclays estimate it to be worth $30 billion. Kakao is forecasting $200
million in revenue for 2013, deriving half of that from games. LINE, widely expected to IPO this
year at a reported $8 billion valuation, brought in $336 million in 2013 revenue from a mix of
selling digital stickers, in-app games and special accounts for advertisers.

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Such extras are “junk,” says Acton. He fears stickers would draw WhatsApp into the
content business; LINE’s series of bunny and bear sticker characters have already made
appearances on TV shows in Japan. The unsexy mission of WhatsApp is reliability.
The dollars will start coming in greater numbers once WhatsApp can iron out dead-simple billing
arrangements with wireless carriers. Koum doesn’t want to risk putting users off with a
complicated payment-request system and watch them run to free rivals. Right now it charges
only in the handful of countries like the United States and United Kingdom, where credit card
penetration is high and mobile payments are mature; that’s still not the case in the Netherlands,
where half the population use WhatsApp but aren’t yet charged for the privilege.
Google is striking billing deals with carriers on behalf of all Android apps, but progress has been
slow: Android carrier billing is available in just 21 countries, and to the ongoing chagrin of other
developers, mobile payments still aren’t standardized. Koum thinks the real money will start
flowing by 2017 and beyond, at which point he plans to have 1 billion users.
“We are very early in our monetization efforts,” says Neeraj Arora, WhatsApp’s business-
development manager. “Revenue is not important to us.” Arora has brokered partnerships with
about 50 carriers to pre-bundle the app into texting plans. The company has also struck a
noncommercial partnership with Nokia to put a WhatsApp button on the inexpensive Asha 210
phone.
Keeping people from switching to another service is priority number two. The fear of losing
eyeballs is what drove Zuckerberg to pay so dearly, but competitors say there’s still not much
stopping them from leaving WhatsApp, and that the founders have tunnel vision.
“For the last five years WhatsApp has been exclusively focused on delivering ‘SMS but free,’
and they have done a great job at that. But at some point the user is going to move on,” says Ted
Livingston, a former BlackBerry engineer who founded the teen-friendly mobile messenger Kik,
which sells digital stickers and lets its users play games with each other.
“This is why WhatsApp feels like BlackBerry to me. For years BlackBerry was exclusively
focused on e-mail. But once the consumer understood this, they asked, ‘What comes next?’ The
iPhone answered that question, and all of a sudden BlackBerry was left behind.”

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For now Koum is staying focused on the two priorities: keeping WhatsApp running and keeping
users from going away. He can do so without the burden of building out the financial and legal
infrastructure of a wholly independent company. “Fundamentally what we care about is building
a product and great user experience,” he says. “[Mark] understands the network effect and he
always talked about making the world more open and connected. Connected is where we come
in.”
It is believed by many experts that WhatsApp was early to sellout to Facebook. Some of the
reasons given are:
 WhatsApp could have been much bigger in five years time. Industry experts believe that
the company could have been valued at $200 billion in 5 years time.
 The company could have achieved greater heights had it been independent.
 They could have build on the platform further leading into e-commerce industry.
 They could have, alternatively, gone for IPO to finance their growth.
Facebook’s perspective
Facebook's acquisition of WhatsApp benefits the social network in a three important ways: It
better positions it to reclaim the teen demographic, a key group of users who have grown
disinterested in Facebook it allows Facebook to buy its way into mobile messaging, one of the
hottest emerging markets that the social network has failed to penetrate; and it presents Facebook
with a big growth opportunity.
The WhatsApp acquisition also propels Facebook to the top of mobile messaging, a market that
it has so far failed to tap. Popular photo messaging app Snap chat famously rejected two offers
from Facebook: one for $1 billion and the second for $3 billion cash. Its own messaging app,
Facebook Messenger, launched in 2011, but it has failed to reach engagement levels that
WhatsApp has achieved.
"Facebook is going to get data on millions of users out of this acquisition, too.”They're going to
have better opportunities to understand mobile use patterns and mobile customers, and use that
information in all sorts of context -- perhaps in advertising in other mobile channels."

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While WhatsApp and Facebook Messenger share similarities. Messenger generally isn't used to
communicate in real time, while WhatsApp is. "Those are big differences in use cases, and the
world needs both. We will help by investing in both.
While Facebook has exceeded 1.2 billion monthly active users, its challenge is reaching the next
billion, which will likely come from developing countries. That's where WhatsApp is thriving.
"WhatsApp is a player that is strong in both mature markets as well as emerging markets across
Asia and the Middle East, which present a significant growth opportunity for Facebook.
WhatsApp’s strength is in emerging markets. "There are countries [such as] Korea or Japan
where another messaging service is bigger, but if you look across the world, WhatsApp -- across
Europe, Latin America, India, a lot of places in Asia -- is the clear leader."
WhatsApp's nearly half a billion users are part of the long-term plan to get Facebook on
smartphones around the world Whatsapp has 450million users with 70% active daily, which is
already 60% the size of Facebook’s daily user community (550million.) By bringing these
people into the Facebook corporate family it assures Facebook of continued relevancy as the
market shifts.WhatsApp is much stronger than Facebook Messenger in Europe, Latin America,
Africa and Australia and has attracted users at a time when it appears that young people are
turning away from Facebook .Facebook has fallen behind in mobile phone messaging apps in
emerging markets, where many are accessing the Internet on fast-growing 3G mobile networks
for the first
The target is reaching 5.6 billion smartphone users by 2019
In the prepared statement for the acquisition, Facebook founder and CEO Mark zuckerberg said
whatsapp is on a path to connect one billion people. The services that reach that milestone are all
incredibly valuable.
This is undeniably true, in the short term. WhatsApp is adding 1 million new users a day and
already has 450 million monthly active users (MAUs). At this growth rate, it could reach the 1
billion MAU mark by early 2016 (allowing for some new users not becoming MAUs).

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WhatsApp will gain 1 billion MAUs in the next five years. But the ultimate target is significantly
larger. Industry estimates for global smartphone adoption is that there will be 5.6 billion
smartphone users by 2019 which is very beneficial for Facebook to get wider reach.
The major growth will be in emerging economies, where WhatsApp is well-established
For Facebook to grow significantly beyond its current 1.23 billion MAUs, it needs widespread
take-up in the emerging economies. WhatsApp is a "clear leader in Europe, Latin America, India
and Asia".
WhatsApp recently said that it had gained 35 million MAUs in India alone demonstrating its
appeal to users in the regions which Facebookis keen to target.
What is often overlooked, however, is that many of the new users for mobile communications
will be accessing the services by low-cost feature phones, not smartphones. Facebook itself is
well aware of this consumer need. It has a dedicated service for these users, Facebook for Every
Phone, but this reported only 100 million MAUs in July 2013.
WhatsApp, with its engineering-led approach, is available on a wide range of devices (iPhone,
BlackBerry, Android, Windows Phone and Nokia) and has a good reputation for working
effectively in areas where mobile coverage is poor. It also has deals with mobile operators
whereby the carriers offer their own customers low-cost data packages for use with WhatsApp.
Five years after its founding, the company has 450 million active monthly users, of which a
staggering 315 million uses it every day. WhatsApp is adding 1 million new users a day - 1
million! Facebook thinks WhatsApp could have 1 billion users in a few years, and this estimate
seems conservative. (Facebook itself only has 1.2 billion users.) WhatsApp also does a lot more
than "text-messaging." It allows users to send photos, videos, and voicemails to each other and
keep the conversations forever. In short, it allows users to do a lot of what Facebook does.
Facebook has fallen behind in mobile phone messaging apps in emerging markets, where many
are accessing the Internet on fast-growing 3G mobile networks for the first time on smartphones.

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Asian rivals such as Tencent Holdings Ltd.’s We Chat, Naver Corp’s Line and Rakuten Inc’s
Viber are well ahead of Facebook messenger across much of Asia.
Facebook has been buying apps with large numbers of young users as part of Chief Executive
Officer Mark zuckerberg’s strategy of helping users share any kind of content.
WhatsApp has very low costs, so it should eventually be wildly profitable.
WhatsApp currently has only 55 employees. Assuming an all-in cost of $200,000 per employee,
that's a total cost base of $11 million. Let's assume WhatsApp grows to, say, 300 employees over
the next few years. Then it will have a cost base of only $50-$75 million. Meanwhile, if the
company's growth trajectory continues, it could easily be pulling in more than $1 billion a year
of revenue in a few years. Almost all of that would be profit.WhatsApp will continue to operate
independently within Facebook. The product roadmap will remain unchanged and the team is
going to stay in Mountain View. Over the next few years, we're going to work hard to help
WhatsApp grow and connect the whole world. We also expect that WhatsApp will add to our
efforts forInternet.org, our partnership to make basic internet services affordable for everyone.
WhatsApp will complement our existing chat and messaging services to provide new tools for
our community. Facebook Messenger is widely used for chatting with your Facebook friends and
WhatsApp for communicating with all of your contacts and small groups of people. Since
WhatsApp and Messenger serve such different and important uses, we will continue investing in
both and making them each great products for everyone.
The brands are diversifying Facebook group and its revenues
The mobile brands are making Facebook effectively into a virtual group of companies. They are
diversifying Facebook's total user base by appealing to groups of users who may be disinclined
to join or regularly participate in Facebook, such as teenagers. They can also run their own
business models. This diversifies Facebook's mobile revenues, just as these become increasingly
critical to the company's finances.
Where Facebook itself has successfully monetized via advertising on its own mobile apps,
Zuckerberg said in the conference call: "I don't personally think ads are the right way to

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monetize messaging systems."
It fits with Zuckerberg's mobile strategy of standalone mobile brands
Zuckerberg has taken the view that Facebook does not have to be the brand for all of Facebook's
mobile operations.
The Instagram app, which Facebook owns, still looks to consumers as a separate entity. Even the
Facebook Messenger app, Facebook's own equivalent of WhatsApp, was rebranded simply as
Messenger last year and the latest Facebook app is named Paper.
The deal pre-empts Asian messaging apps from closing Facebook out of the emerging
nations
Facebook is confronted by three large and well-funded messaging providers based in Asia, which
represent next-generation, mobile-native social networks: KakaoTalk, Line and We Chat. They
are all expanding aggressively into the same regions where Facebook needs to grow.
If any one of these had succeeded in buying WhatsApp, it would have been a strategic disaster
for Facebook, denying it solid expansion potential across dozens of key markets.
Conclusion
Looking at the deal from neutrals prospective it can be said that Facebook has taken a positive
risk by buying out WhatsApp. It will get access to WhatsApp’s customer base and will continue
to grow. Although it remains to be seen whether WhatsApp is allowed to function as an
independent business unit or rebranded by Facebook. From WhatsApp point of view the value
offered was huge and tempting. Also they saw the opportunity to grow with vast base of
Facebook. From the outside it looks to be brilliant move on both side but careful examination
reveals risks involved on both sides. WhatsApp might have undervalued their firm as did owners
of YouTube, Instagram and PayPal realized later. Facebook on the other hand will be trying hard
for its own products to compete with WhatsApp and in the process keep the standards of the
WhatsApp to its present level. Problems such as cannibalization and whether to allow WhatsApp
to work as a separate business unit have to be sorted out. Only time will tell whether the deal was
a success or failure.

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 wallstreetinsanity.com
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