WhatsApp

Abstract
Summary Notes

Abstract

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal discuss the staggering growth and impact of WhatsApp, a messaging platform acquired by Facebook for $22 billion. Despite its sizeable user base of 1.5 billion and its role as the world's most popular messaging app, WhatsApp's monetization remains a question mark, with Facebook recently pulling back from plans to introduce advertising. The hosts explore WhatsApp's journey from a simple status updater to a global messaging giant, its strategic value to Facebook, and the ethical considerations surrounding social media companies. They also delve into the founders' departure and their resistance to Facebook's advertising model, highlighting the platform's significant role in the competitive landscape and its potential as a tool for remittances and business communication.

Summary Notes

Facebook's Financial Performance

  • Facebook's operating margin is significantly high, overshadowing the gross margin, which is typically highlighted for other companies.
  • Facebook retains $0.45 of every dollar after covering all expenses, indicating a highly profitable operation.
  • The company's market capitalization is valued at $630 billion, reflecting its financial success.

"But Facebook's actual operating margin is so good that that is what shows up everywhere because they actually make money and they make a ton of it."

This quote emphasizes the exceptional operating margin of Facebook, highlighting its profitability and the rarity of such financial performance in comparison to other companies analyzed in the podcast episodes.

"I mean, the way to think about that status, like, for every dollar they bring in house, they keep $0.45, even after paying for everything, all of their fixed costs, all their employees. It's just a cash machine, man."

The quote provides a clear picture of Facebook's financial efficiency, illustrating how a significant portion of revenue is retained as profit, demonstrating the company's strong financial health.

"That's why it's a $630,000,000,000 market cap company. Yep."

This quote links Facebook's high operating margin and profitability to its substantial market capitalization, indicating the market's valuation of the company's financial success.

WhatsApp Acquisition by Facebook

  • Facebook acquired WhatsApp for $22 billion, which is a substantial investment considering WhatsApp's lack of significant changes or integration of Facebook's core advertising model.
  • The acquisition's effectiveness is debated, with arguments for both it being a poor decision and a genius move.
  • The podcast aims to explore WhatsApp's story and evaluate the acquisition's success.

"Today we are talking about WhatsApp, an app that Facebook paid $22 billion for and has done virtually nothing in the six years since."

This quote sets the stage for the discussion on WhatsApp's acquisition by Facebook, noting the high purchase price and the lack of significant development or monetization efforts since the acquisition.

"So today we will decide, was this one of the worst acquisitions of all time, or did Facebook make a genius move even for this insanely, insanely high cost?"

The quote presents the central question of the podcast episode, inviting a detailed analysis and debate on the strategic value of Facebook's acquisition of WhatsApp.

Pilot as a Financial Service for Startups

  • Pilot is a financial service provider for startups and growth companies, offering accounting, tax, and bookkeeping services.
  • The company is now a billion-dollar firm backed by notable investors, indicating its growth and success.
  • Pilot's services allow companies to focus on their core business by outsourcing financial operations to experts.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

This quote highlights Pilot's position as a leading accounting firm for startups in the US, emphasizing its comprehensive financial services.

"Pilot both sets up and operates your company's entire financial stack... Pilot takes care of all that, and they've been doing this now for years across thousands of startups in Silicon Valley and beyond."

The quote explains Pilot's role in handling the entire financial operations for companies, showcasing its experience and trust within the startup community.

"Yep. And when you say thousands of companies, Pilot does this for David. These are now companies like OpenAI, airtable, and scale, as well as e-commerce and other companies."

This quote provides examples of notable companies using Pilot's services, reinforcing the firm's credibility and the wide range of clients it serves.

Early Life and Background of WhatsApp Founders

  • Yan Kum grew up in a challenging environment in Ukraine, moved to the US at 16, faced economic hardships, and lost both parents.
  • Brian Acton's upbringing included lessons in entrepreneurship and responsibility from his mother; he later became a successful engineer at Yahoo.
  • Both founders experienced disillusionment with Yahoo's business model and advertising focus, leading to their departure and subsequent rejection by Facebook.

"It was so run down that our school didn't even have an inside bathroom... Society was extremely closed off."

This quote describes the harsh conditions Yan Kum experienced growing up in Ukraine, setting the context for his resilience and future success.

"Brian and Jan kind of become kindred spirits when Jan joins Yahoo and Brian really rises through the ranks."

The quote encapsulates the relationship between WhatsApp founders Yan Kum and Brian Acton, highlighting their mutual experiences at Yahoo and their shared disillusionment with the company's direction.

Development and Launch of WhatsApp

  • WhatsApp was conceived as a solution to communication challenges faced by Yan Kum during his travels.
  • The app initially focused on status updates but evolved into a messaging platform utilizing phone numbers for user identification.
  • WhatsApp's growth was facilitated by accessing users' address books to identify contacts already using the service.

"What I really want and what I would have loved when I was in Argentina and all these other countries is that I could just throw up the equivalent of an away message and all my friends could know what I was doing and that I was, okay, I'm just going to build this out on this new iPhone that I got."

This quote explains the original concept behind WhatsApp, reflecting Yan Kum's desire for a simple way to communicate his status to friends while traveling.

"What if instead of... having screen names and usernames, we just use phone numbers?"

The quote reveals the innovative approach WhatsApp took to user identification, leveraging phone numbers from users' address books to simplify the connection process and overcome network cold start issues.

Incorporation of WhatsApp Inc.

  • Jan Koum incorporates WhatsApp with a straightforward and informal approach.
  • The process is done quickly and inexpensively, without the need for prestigious law firms.
  • Jan Koum takes a photo of the incorporation papers and sends it to Apple to get WhatsApp Inc. established on the App Store.

Francisco, you show them the articles, they stamp it. You pay $100 and you're done. So that's what Jan does. He drives up, he does that. He takes a photo of it, and he sends it into Apple, and boom, whatsApp Inc. Is.

The quote explains the simplicity and low-cost approach Jan Koum took to incorporate WhatsApp Inc., highlighting the contrast to the usual complex and expensive process of starting a company.

Initial Failure and Persistence

  • Jan Koum's first version of WhatsApp fails horribly.
  • The app initially only allows users to post statuses, similar to away messages, without notifications.
  • Despite poor usage, Jan Koum continues to work on the app, encouraged by his friend Brian Acton.

Well, you even use legal zoom. Yan was just like, he literally scribbled some stuff on paper and did it by hand. So they get that done. They ship the app. With these great expectations. Jan thinks it's going to be so awesome. And in his own words, direct quote, it fails horribly.

This quote describes the initial failure of WhatsApp and Jan Koum's informal approach to legal paperwork, setting the stage for the app's humble beginnings and subsequent iterations.

Growth Hacks and Iteration

  • Jan Koum uses a clever growth hack by changing the app's name weekly to appear in the App Store's "What's New" section.
  • The tactic results in increased user downloads and feedback.
  • Jan Koum and Brian Acton bond over ultimate Frisbee, and Brian encourages Jan not to give up on WhatsApp.

Apple had the what's new section and Jan realizes he's like, you know what, I can get a lot of people just trying this out. If every week I change the name of the app slightly, Apple will put me in the what's new section week after week.

The quote reveals Jan Koum's growth hack strategy for gaining user traction for WhatsApp, leveraging the App Store's features to increase visibility.

The Turning Point with Push Notifications

  • Apple introduces push notifications in WWDC 2009, which becomes a pivotal moment for WhatsApp.
  • Jan Koum initially uses push notifications to broadcast status updates, but users request messaging functionality.
  • WhatsApp's network is based on phone numbers, differentiating it from other messaging apps and contributing to its success.

Oh man, is it ever. The funny thing is, you would think, and in hindsight now, this is so obvious, it's like, oh, now I don't have to rely on users randomly deciding to open up my app and see what's going on. I can now send them notifications and prompt them to do this.

The quote captures the significance of Apple's introduction of push notifications, which enables WhatsApp to evolve from a status update app to a messaging platform.

WhatsApp's Evolution into Messaging

  • Users begin using the status feature and push notifications as an improvised messaging system.
  • Jan Koum and Brian Acton recognize the demand for messaging and incorporate it into WhatsApp.
  • The app's simplicity and phone number-based network lead to rapid growth and adoption.

Anyway, so they figured this out like, okay, great, we're going to build messaging into this. They do, they launch it in late August, early September of 2009, and it immediately takes off again.

This quote describes the moment when WhatsApp's founders decide to pivot to a messaging app, leading to its explosive growth and popularity.

Investment and Business Model

  • Brian Acton joins WhatsApp full-time and they raise $250,000 from former Yahoo! colleagues.
  • WhatsApp charges a $0.99 fee for the app, which helps manage growth and server costs.
  • Sequoia Capital invests $8 million in WhatsApp at a valuation just shy of $80 million.

And he says, I'm going to invest some of my own money from my Yahoo Savings and let's go round up a bunch of our former friends at Yahoo and put an angel financing together.

The quote highlights the initial funding round for WhatsApp and the decision to charge a fee for the app, which was a strategic move to sustain the company's growth.

Messaging as the Killer App for Mobile

  • Messaging is identified as the essential function for mobile phones, surpassing other apps in importance.
  • WhatsApp's focus on messaging aligns with user behavior, where the most critical communications occur.
  • The app's growth and importance of messaging are recognized by investors and users alike.

Messaging is the killer app for mobile, like, period, full stop.

This quote underscores the realization that messaging is the fundamental application for mobile devices, a realization that drives WhatsApp's focus and success.

Product-Market Fit and Scaling

  • WhatsApp experiences a shift from struggling for user engagement to overwhelming adoption.
  • The company's growth leads to interest from investors and potential employees.
  • Sequoia Capital's investment strategy and non-interference approach resonate with WhatsApp's founders.

Before product market fit. And then all of a sudden they have instant product market fit with messaging and everything changes.

The quote reflects on the dramatic change in WhatsApp's trajectory once it achieves product-market fit, transforming the company's prospects and attracting significant interest from the tech community.

Interest from Facebook in WhatsApp

  • Mark Zuckerberg (referred to as Zuck) expressed significant interest in WhatsApp before the $50 million funding round.
  • Facebook had recently gone public and had liquid currency to potentially invest in or acquire companies like WhatsApp.
  • Zuckerberg and WhatsApp co-founder Jan Koum had a meeting where potential collaboration was discussed.

"But Zuck makes it clear he's really, really interested in what WhatsApp is doing."

The quote indicates Zuckerberg's keen interest in WhatsApp and the potential for partnership or acquisition by Facebook.

Facebook's Stock Situation

  • Facebook's stock was in a dip around the time of initial interest in WhatsApp.
  • This dip in stock value is suggested to be a reason why an acquisition did not happen immediately.
  • Subsequently, Facebook's stock value increased significantly after the acquisition of Instagram.

"Stock may have been in quite the dip, and that's probably actually why nothing happened at that point in time, was the stock was in the dumps."

The quote suggests that Facebook's low stock value was a deterrent to acquisition talks with WhatsApp at that time.

WhatsApp's Growth and Tencent's Interest

  • WhatsApp's user base grew to over 400 million users.
  • Tencent, a major Chinese tech company, was prepared to acquire WhatsApp for a high single-digit billion-dollar amount.
  • Tencent's deal with WhatsApp was delayed due to Tencent CEO Pony Ma's back surgery.

"Tencent was ready to do a deal to buy WhatsApp in the single digit billions high single digit billions."

The quote highlights Tencent's readiness to acquire WhatsApp for a significant sum, indicating WhatsApp's high valuation and desirability as an acquisition target.

Google's Interest in WhatsApp

  • WhatsApp co-founders Jan Koum and Brian Acton informed Google of potential acquisition talks.
  • Sundar Pichai, then running Android at Google, arranged a meeting with Google CEO Larry Page for WhatsApp.
  • Google was still considered a contender in the mobile messaging space at this time.

"Sundar gets them a meeting scheduled with Larry Page for Tuesday, February 11, 2014."

The quote shows that Google was also interested in acquiring WhatsApp and had arranged a high-level meeting to discuss potential acquisition.

Facebook's Acquisition Offer

  • Zuckerberg invited Koum to his home to discuss a serious acquisition proposal.
  • Facebook offered WhatsApp independence, a significant acquisition sum, stock options, and a board position for Jan Koum.
  • Zuckerberg was aware of WhatsApp's stance on advertising and privacy and tailored the offer to respect these values.

"We want to acquire you. It'll be a big number. WhatsApp is going to remain independent."

The quote reflects Facebook's formal acquisition offer to WhatsApp, emphasizing the large sum involved and the promise of operational independence.

Negotiations and Valuation

  • WhatsApp co-founders considered their platform's value in comparison to Twitter, which had a $30 billion market cap with fewer monthly active users (MAUs).
  • WhatsApp co-founders decided they should be worth at least $20 billion.
  • Zuckerberg agreed to the valuation and the acquisition moved forward.

"Well, Twitter is worth 30 billion. We're bigger than they are. We got to be worth at least 20 billion."

The quote indicates the rationale behind WhatsApp's valuation and the subsequent agreement by Zuckerberg to the proposed valuation.

Finalization of the Deal

  • The final acquisition amount was negotiated to $19 billion, which later increased to $22 billion due to Facebook's stock price increase.
  • A clause was included in the acquisition contract that would allow Koum and Acton to leave with full stock vesting if Facebook implemented advertising on WhatsApp.

"If Facebook ever implements advertising on WhatsApp, that the two of them... would get full acceleration of any vesting on that stock and that they could walk away with all the money."

The quote explains a key term in the acquisition agreement designed to protect WhatsApp's advertising-free policy.

WhatsApp's Independence and Growth Post-Acquisition

  • WhatsApp continued to grow, reaching 1.5 billion MAUs.
  • WhatsApp remained independent and did not implement advertising, in line with the founders' vision.
  • The acquisition terms included significant cash and stock considerations for WhatsApp shareholders.

"WhatsApp is going to be independent, it's not going to be advertising."

The quote reinforces the commitment made by Facebook to keep WhatsApp independent and ad-free post-acquisition.

WhatsApp Business and Monetization Attempts

  • WhatsApp launched a separate app for businesses, WhatsApp Business, but it did not significantly contribute to monetization.
  • Facebook attempted to integrate advertising into WhatsApp but later retracted the plan.
  • Other monetization efforts, such as mobile payments and the Libra cryptocurrency project, have not yet been successful.

"They launch WhatsApp business, which is a second WhatsApp app... but they really haven't done much."

The quote highlights the lack of significant progress in monetizing WhatsApp despite various attempts, including the launch of WhatsApp Business.

WhatsApp Acquisition Motivations

  • WhatsApp's acquisition was driven by various factors including expected synergies, monetization opportunities, strategic mobile ecosystem advantages, and mobile messaging expansion.
  • Facebook's decision to acquire WhatsApp was not solely based on immediate financial gains but also on the necessity to control a significant player in the mobile messaging space.

"The WhatsApp acquisition is primarily attributed to expected synergies from future growth, from potential monetization opportunities, from strategic advantages provided in the mobile ecosystem, and from expansion of our mobile messaging offerings, which to me says 15.3 billion of. We have no idea. We just needed to own this thing."

This quote explains the rationale behind the acquisition, highlighting that while the exact benefits were not clear, the strategic need to own WhatsApp was paramount.

Goodwill and Accounting Treatment

  • Goodwill in accounting is often a plug for excess acquisition costs over the tangible assets acquired.
  • Facebook likely anticipated WhatsApp to become a significant cash flow source, similar to Instagram's success post-acquisition.

"Now, of course, this is accounting treatment, and anybody who's worked in investment banking, or certainly accounting, knows goodwill is just where you stuff. It's a plug. But I think you're right, this is illustrative. I think they were thinking, yeah, this is going to take a while and whatnot, but I think Facebook was fully expecting that this was going to be a cash flow monster, just like Instagram."

The quote discusses the use of goodwill in accounting as a way to justify the premium paid for WhatsApp, with the expectation of future financial benefits.

Acquisition Categories and Takeout Concept

  • Acquisitions are categorized by their primary motivation: people, technology, product, business line, asset, or other.
  • WhatsApp's acquisition was a "takeout," aimed at preventing its existence as an independent entity or in the hands of a competitor.

"And occasionally we categorize it as something that I'm going to elect to use today, which is a takeout, which is, it is worth a lot of our money to stop this thing from existing as an independent entity or in the hands of someone else."

This quote underscores the strategic move by Facebook to acquire WhatsApp to eliminate a potential threat by ensuring it did not remain independent or fall into competitors' hands.

Defensive Acquisition Strategy

  • Facebook's acquisition of WhatsApp was partly defensive, to prevent competitors like Google or Tencent from acquiring it.
  • Facebook was considering expansion into China, and owning WhatsApp was crucial to this strategy.

"But I think defensive. And then fast forward to now and yeah, things are pretty sad, the state of affairs, as we just described. On the other hand, this gets into if you're ready to move on to what would have happened otherwise."

The quote points to the defensive nature of the acquisition, considering the potential consequences had WhatsApp been acquired by a competitor or remained independent.

WhatsApp as an Independent Threat

  • An independent WhatsApp posed a significant threat to Facebook's attention share and profit margins.
  • Facebook's business relies on maintaining attention share, making the acquisition a strategic move to mitigate risk.

"It's not so much about what is Facebook gaining by owning it, it's how much are they decreasing their risk of having no value in the future by this thing existing."

The quote emphasizes the importance of the acquisition in terms of risk mitigation, rather than immediate gains, highlighting the strategic importance of controlling attention share.

User Base and Network Scale

  • WhatsApp's large user base made it a unique acquisition target, with more monthly active users than other social networks like Snapchat and Twitter.
  • Facebook's ownership of multiple large networks is a testament to its dominance in the social media space.

"Of the, what, seven networks that have the seven social networks that have over a billion people, Facebook owns four of them."

This quote illustrates Facebook's strategic position in the social media landscape, owning multiple platforms with over a billion users, and the significance of WhatsApp's user base in this context.

Acquisition Playbook and Value Creation

  • The acquisition enabled Facebook to execute strategies that would not have been possible otherwise.
  • WhatsApp and Facebook leveraged platform shifts and disruptive business models to become dominant in the messaging space.

"All right, so, listeners, this is where we sort of analyze what did this acquisition enable them to do, them being Facebook and what plays or what tactics did WhatsApp and Facebook use along the way to become this behemoth that it's become?"

This quote sets the stage for discussing the strategic moves and tactics that the acquisition of WhatsApp enabled, leading to the creation of significant value within the Facebook ecosystem.

Acquisition Grading and Justification

  • The acquisition is graded based on its defensive value and the potential threat WhatsApp posed as an independent company.
  • Despite the lack of immediate financial returns from WhatsApp, the acquisition is seen as a necessary move to maintain Facebook's market position.

"I am going to grade this an a. I don't think it's an a plus, but I'm going to grade this an a. And the reason I'm going to is obviously the same sort of defensive play argument."

This quote provides a personal assessment of the acquisition, rating it highly due to its strategic importance in neutralizing potential threats and securing Facebook's future in the social media realm.

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