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WhatsApp: Meta's Next Growth Engine
WhatsApp is one of the largest platforms in the world and is quite possibly Meta’s most underappreciated asset.

But the crazy thing?

It nearly failed.

The backdrop

WhatsApp was created in early 2009 by two former Yahoo! employees, Brian Acton and Jan Koum, who saw a massive opportunity in the fledgling mobile market after the launch of the iPhone. Their idea was to create an app where you could attach status updates for your address book to see, including if you were on a call on your device, busy in a meeting, etc. But in the early months, continual technical troubles and a lack of overall appeal led to only a handful of downloads.

That changed when Apple launched push notifications; allowing users to see status updates from others even when not actively using the app. People began to use WhatsApp as an instant messenger. That’s when Brian and Jan saw the opportunity to pivot. In August 2009, focused entirely on messaging, the duo launched a new version of the app, and active users quickly jumped to over 250,000.

WhatsApp’s user base continued to grow as it climbed the ranks of the App Store; catching the eye of the rest of Silicon Valley. In 2010, Google met with the founders, and upon seeing the potential, they quickly made a $10 million offer for WhatsApp. The founders just as quickly said no. Several months passed, and Google increased its offer to $100 million. Brian and Jan passed a second time.

But as the app grew, so did costs, and the company needed money. WhatsApp was converted from a free service to a paid one, in which users would pay a one-time fee of $.99. Not only would this generate essential revenue but it would help slow down growth to a more manageable level.

It wasn’t enough.

In early 2011, after months of negotiation, Sequoia Capital invested ~$8 million for ~15% of the company. Within two years, monthly active users had crossed 200 million, and Sequoia invested another $50 million, valuing WhatsApp at $1.5 billion. The company also changed its model from a one-time fee to free upfront with a $.99/year subscription thereafter. But that didn’t slow the company down, and by the end of 2013, monthly active users had doubled to 400 million.

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It was only natural for this to alarm Facebook, which for the past several years had been navigating its own shift to mobile. However, seeing an opportunity, Facebook decided to open its war chest rather than go to war. On February 19th, 2014, Facebook (now Meta) acquired WhatsApp.

The purchase price?

A jaw-dropping $4 billion in cash, ~$12 billion in Facebook shares, and ~$3 billion in restricted stock grants set to vest over a 4-year period. In total, due to share price appreciation, the company paid well over the initial price tag. It would be the largest venture-backed acquisition ever done and completely dwarfed Facebook’s $1 billion acquisition of Instagram two years prior.

But the deal was easy to criticize. For the full year of 2013, WhatsApp generated a mere $10 million in revenue and recognized a net loss of $138 million. Paying >$22 billion for a loss-generating business doesn’t sound great. However, justification lies in the fact that in one single move Facebook was able to acquire a huge number of users and their personal information, and all but guaranteed it retaining its spot on the top of the mobile mountain. After all, the company had spent the last few years shifting its focus to mobile, and losing future growth to a would-be competitor would be much more costly. This was affirmed during the Q3 2014 call (half a year after the deal announcement), as per Mark Zuckerberg’s comments (emphasis added):

"Part of what we've seen is that the use cases for products like Instagram and WhatsApp are actually more different and nuanced from -- than the products that the people compare them to, that Facebook had already built. So for example on the WhatsApp and Messenger side, Messenger's primarily used today for people to chat with their Facebook friends, within this context of, maybe it's not like a real-time text, like you would send an SMS on your phone, but it's something that you're sending to one of your Facebook friends, then if they happen to be there, and then you can text back and forth, or maybe they respond later. SMS and WhatsApp are more for kind of real-time activity. People have contacts on WhatsApp who they wouldn't want to make friends on Facebook, the graphs there are somewhat different. So one of the things that we found, interestingly, to us as well, was that Messenger and WhatsApp were actually growing quickly in a lot of the same countries."

To further appreciate the risk Facebook faced requires looking at what led to WhatsApp’s rise in the first place.

WhatsApp’s growth engine

WhatsApp was created with privacy in mind, with all of its services utilizing end-to-end encryption. Its team also vowed to provide a seamless user experience that would never be cluttered with ads. But the real success of WhatsApp can be attributed to one driver:

Accessibility.

WhatsApp was developed to be platform-agnostic and with a mobile focus, making it compatible with nearly all smartphones. It has also always been free to send and receive messages through WhatsApp, which is critical in countries where consumers can’t afford plans where they are charged for messaging. And instead of signing up and creating a username and then asking people for their username to connect, you simply used your mobile number. These factors made WhatsApp not only easy to use but also outrageously affordable, especially for those in developing countries who began to see it as the way to communicate. But there was still one barrier to entry: payment. However, in January 2016, WhatsApp scrapped the annual subscription fee, making the app completely free for users. Since then, the achieved network effect has been awing:

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WhatsApp's monthly active users are still widely cited to be ~2 billion. However, that number was reached in early 2020. Similar growth has likely occurred with the number of messages sent per day on the platform, growing from ~100 million/day in October 2020. In fact, the present number of daily active users is greater than the monthly active users from just two years ago, as Mark Zuckerberg on the Q3 2022 call stated:

"WhatsApp has more than 2 billion daily actives, also with the exciting trend that North America is now our fastest-growing region. Across the family, some apps may be saturated in some countries or some demographics, but overall, our apps continue to grow from a large base."

Meta does not break out WhatsApp from the rest of FoA but the above comment should catch your attention. At over 2 billion, WhatsApp DAUs are larger than that of any other social media platform, including Facebook’s 1.984 billion as of Q3 2022. Additionally, the platform sports strong demographic mixes, including nearly half of the users estimated to be between ages 15-35:

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WhatsApp: Meta's Next Growth Engine
A look at Meta's least appreciated asset.

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