The $19 billion messaging app

A couple of years ago (long time by Internet standards), I prognosticated the death of SMS in its original cellular operator driven version. My argument was that mobile OS driven messaging experiences like iMessage, Google Hangouts and Facebook Messenger would make it affordable (almost free) for people to exchange messages instead of paying the $5-$10 for a messaging plan. At that time, Viber and WhatsApp were at their infancy. Since then WhatsApp has grown to 450 million users and adding close to a million more every day.Earlier today, Facebook announced that it was acquiring the popular messaging app WhatsApp for $19 billion ($4 billion cash, $12 billion stock and $3 billion in RSUs). The entire social media is abuzz and rightfully so. This completely changes the baseline for valuation for similar messaging apps (Viber sold for $900 million recently) and also raises the bar for whoever else is left single (LINE, WeChat). So why did Facebook choose to buy WhatsApp for this massive sum of money?Initial ReactionThere are a lot of theories floating around, pretty much models and assumptions at this point. Let us look at some initial reactions. We start with Mark Zuckerberg's take on why he did it. He makes an aspirational argument but I do think there is financial modeling behind his enthusiasm. His Instagram acquisition seemed expensive when he made it and yours truly was one of those who questioned it. I still don't see the magic on Instagram but definitely am sold on why Mark bought it. It was a smart purchase and in hindsight, for a decent price.Rounding the corners, Marc Andreessen (who sits on the Facebook board) sounds bullish on the Whatsapp deal as does Sequoia Capital which backed Whatsapp early on. Ben Evans has a good analysis piece on the deal which is well worth a read. He makes the argument that messaging is still in its infancy and has a big future ahead. Ben Thompson also believes that messaging is the next big thing and sounds bullish on WhatsApp and the like. All of these internet influencers are sold on two ideas- Facebook knows what its doing and that mobile messaging is just getting started. I believe both arguments are valid ones- Facebook has definitely done right with Instagram and mobile messaging is definitely going to be huge. But whether the price for that is $19 billion is the big question.Kara Swisher at Recode thinks that this establishes the base value for anyone with aspirations for a mobile OS or something close. Her reasoning being that this is an entry point for Facebook into mobile's core experiences. Something it failed to do with Facebook Home. Robinson Meyer at The Atlantic thinks that WhatsApp is one of very few that is a potential threat to Facebook and by buying it, Facebook was eliminating a threat and adding to its arsenal for global domination. Sarah Lacy at Pando Daily has an intriguing theory- photos was why Facebook bought WhatsApp. The sharing of photos on WhatsApp has been growing at a rapid rate- 500 million photos a day at last count. That puts it ahead of SnapChat at 400 million a day. Between Facebook Photos and Instagram, Facebook has a sizeable share of personal photos on the Internet. It tried to buy SnapChat and failed. The WhatsApp acquisition gives it a big leg up on the photos game.Why WhatsApp?From a messaging app standpoint, WhatsApp is by far the largest and most global in nature. While WeChat (Weixin) and FINE are huge in their respective countries, WeChat in China and FINE in Japan, they are not truly global like WhatsApp. WhatsApp is also the one that can and possibly will take Facebook to its second billion users. At 450 million currently and rapidly climbing at the rate of almost a million new users a day, WhatsApp will potentially hit a billion users in a couple of years. In that time, it will possibly be second only to Facebook itself in photo sharing. All this makes the deal look good from Facebook's standpoint.WhatsApp is also the closest in terms of a competitor to Facebook. It is the closest in terms of challenging Facebook for user engagement. It allows people to have group chat sessions, engage with friends, share messages, links, photos and videos - all in an ultra simple ad-free and clutter free interface that appeals to many, myself included. By eliminating the threat of competition from WhatsApp, albeit at a large cost, Facebook is free to pursue its goal of connecting and expanding a global audience with its portfolio of apps- Facebook, Facebook Messenger, Instagram and now WhatsApp.Monetizing WhatsAppWhile there are a lot of good reasons for Facebook to buy WhatsApp, there is the question of revenue to justify the cost. WhatsApp charges its users $1 per year. While this is a solid revenue stream for a small company with 50 employees and very little venture capital investment, this is a drop in the ocean for a big player like Facebook. Facebook obviously sees WhatsApp adding value in ways over and beyond the $1 it generates per user per year.And then there is the topic of ads. Facebook's business model is built around using its customer's data and interests and offering targeted ads. This has been a solid revenue model for Facebook and growing. Facebook is looking to build other products around this availability of troves of customer data and preferences. WhatsApp has an avowed disinclination for ads in its app. So as much as the data that Facebook will gather via WhatsApp, it cannot be used to display ads, atleast on WhatsApp. Facebook could potentially use the WhatsApp customer data and use them in your Facebook ads targeting but that is assuming the credentials are unified. It remains to be seen if that happens and when. Unlike Instagram which is its own self contained social network where Facebook can do targeted ad campaigns, WhatsApp's UI and model does not fit with the same system, atleast for now.Time will tell...I am still trying to grasp the enormity of this exit. The two founders supposedly stand to net $5 billion each while Sequoia, the lone investor is expected to net close to $3.2 billion. The 48 other employees of WhatsApp are millionaires many times over today. Is this the peaking of the next bubble or a smart play, time will tell.