Musings on the Messy Divorce of Facebook and WhatsApp

I still remember the overall tenor of astonishment when Facebook announced in 2014 that it was acquiring messenger app WhatsApp for a staggering $19 billion, blowing away other notable acquisitions such as Apple’s $3 billion purchase of Beats. This was generally viewed as a coup for Facebook, with some going as far as to call it Facebook’s best purchase. The excitement in the air was palpable as people imagined the new levels Facebook’s support could give WhatsApp.

It didn’t work out that way.

The Wall Street Journal provides a good perspective of how ugly the split was between Facebook and WhatsApp was. Founders Brian Acton and Jan Koum are walking away leaving about $1.3 billion on the table.

As much as excitement as there was surrounding the WhatsApp acquisition and what it could mean for Facebook, some industry observers including myself were skeptical from a very early point. This acquisition highlighted a structural mismatch: WhatsApp is ad-free but a $1 subscription kicks in after the first year and is an alternative to the cell provider’s traditional text messaging. Facebook built its immense fortune on advertising and has remained committed to it if the quote on that WSJ story is any indicator: “Advertising supported businesses like Facebook equalize access and improve opportunity.” Acton and Koum believe in privacy issues to the extent where they’ve shown wariness about commercial applications of WhatsApp.

Koum and Acton had reportedly been disagreeing quite frequently with Facebook chief Mark Zuckerberg and COO Sheryl Sandberg, who wanted to see a faster, larger return on the messaging app. While Instagram, acquired in 2012 for a comparatively paltry $1 billion, has gradually been “Facebook-ified” with features such as Facebook’s signature algorithmic timeline it seems as though Koum and Acton stood their ground more firmly about how their app was used. Zuckerberg and Sandberg, by comparison, clearly remain committed to their ads-based model even as Facebook has found himself embroiled in controversy in both the United States in Europe.

Facebook has built a massive advertising business around targeting advertising, and Zuckerberg and Sandberg have both touted how an an advertising-driven model makes it free for consumers and helps bridge the digital divide. Whether or not Zuckerberg and Sandberg are true believers in this philosophy or whether they’re more financially motivated is an open debate, although it seems clear that they were unhappy about both the philosophical approach to WhatsApp advocated by its founders as well as the amount of money WhatsApp was bringing in since 2014.

Beyond the philosophical clash between Facebook and WhatsApp’s decision makers it’s hard to imagine a scenario where money wasn’t involved in Facebook’s push for more advertising. If center of all conflict is economics, the driver of it is how much money. At the time of the sale WhatsApp was profitable based on fee-revenue even though the data wasn’t and still isn’t publicly available. With hundreds of millions of users WhatsApp had to at least be sustaining itself through its incremental annual fee. It just wasn’t making all of the money in the world, which wasn’t enough for an entity like Facebook.

This is the problem of being acquired by a public company when you’re a (relatively) smaller, private outfit: Expectations.

Take me, for example. I run a local web hosting company. I’ve clashed fairly frequently with one of my (still wonderful) mentors, who has spent most of his career at public companies. I’ve soundly rejected a number of ideas that I considered and still consider ludicrous: Raising prices across the board for $1 without explanation except for a standard E-mail announcement. Tacking a $1 “service fee” onto renewing domains on behalf of clients (which I already bill them for).

To me, this is exactly the kind of nickel and diming that I sought to escape, and it’s representative of the corporate culture that drives rock bottom approval ratings of entities like large commercial banks. Yet it’s the kind of philosophy you almost always see at large companies. It doesn’t matter if you potentially burn bridges or damage your credibility with your customers because at public companies, it’s no longer about them. Your shareholders are who you really answer to.

It’s the type of culture that promotes monetizing your actual customers ahead of monetizing the customer, and it’s what turns entities like Facebook from relatively simple social networks into sprawling Rube Goldberg machines in their quest to promote as many avenues to make money as possible. Not for their own survival or to stay solvent but because companies at the level of Facebook are dictated entirely by a need for more, more, more. It might not even just be outright greed; Facebook has almost certainly arrived at the surreal level in corporate culture where making ridiculous amounts of money at the expense of all else is expected.

If anyone remembers the Star Wars Battlefront 2 mess, Electronic Arts provided a sterling demonstration of this. The rollout of Star Wars Battlefront 2 was a total disaster, to the point where EA blamed the loot box controversy on poorer than expected sales. Yet for a long time, apologists have frequently pointed to loot boxes as something AAA video game publishers like EA need in order to make money. Video game publishers themselves insisted that loot boxes were there for the players’ benefit.

Both of these talking points are questionable at best, but given EA’s dogged pursuit of controversial in-game systems that emulated gambling mechanics one can assume that a lot of money was in the table, right?

Wrong. In an extremely bizarre admission to investors – the only people public companies tend to be honest with – EA flat out admitted that it expected ‘no material impact‘ on financial earnings after turning off Star Wars Battlefront II’s microtransactions. It’s interesting that when it comes to facing consumers and the press EA constantly touted this as a benefit to players despite the overwhelming backlash, but when it came time to speak to investors worried about the backlash it was all about the money.

As completely unrelated as this New York Times article is, this one paragraph in particular stands out to me:

Long ago, 40 percent of Link-Belt’s stock was owned by its employees, according to a company document from 1925. Back then, business schools taught that a chief executive’s role was to balance shareholders’ interests with those of employees, customers and the government.

But today, most of Rexnord’s shares are held by mutual funds managed on behalf of global investors. To many, Rexnord was nothing more than three letters on a page — RXN — with an arrow pointing up or down.

One of the new issues facing an increasingly globalized world is the diminishing cares of larger companies on local matters: Namely employees or even customers. I’m hardly interested in advocating a return to a decentralized, non-globalized world, but it’s going to be a big problem when the pursuit of higher stock prices damns collateral damage. When companies continue indulging themselves, oblivious to the consequences, something or someone else will become that consequence, as Facebook figured out recently.

Shifting gears back to the topic at hand, 2016 was when the real trouble undoubtedly started for WhatsApp, though:

WhatsApp topped one billion monthly users, and it had eliminated its 99 cent fee. Facebook told investors it would stop increasing the number of ads in Facebook’s news feed, resulting in slower advertising-revenue growth. This put pressure on Facebook’s other properties—including WhatsApp—to make money. That August, WhatsApp announced it would start sharing phone numbers and other user data with Facebook, straying from its earlier promise to be built “around the goal of knowing as little about you as possible.”

In hindsight this was almost certainly the first horseman of the Apocalypse for this awkward marriage. This was undoubtedly perceived as a blow to WhatsApp’s more dedicated users who used the platform specifically to avoid situations like this. Brian Chen even described it as an anti-Facebook whose founders were presumably won over, though to be fair a $20 billion price tag can obscure a lot of things.

As sympathetic as I am to the WhatsApp cofounders I’m still somewhat perplexed; they had to assume this situation would happen. It’s always something of a risk when you sell to a larger company. Dany Levy thought she was securing the future of DailyCandy by selling it to NBCUniversal only to watch them shut it down and for DailyCandy to disappear into the Internet ether. Except that was complicated by the recession; Koum and Acton had to know going into this that Facebook was was going to monetizing their pants off given the purchase price!

If I’m being charitable, it’s entirely possible that Koum and Acton simply underestimated the pressures that being beholden to shareholders rather than overseeing a private company would bring. Sure enough, WhatsApp soon started running into the same problem: Making money, but not all of the money in the entire world, which wasn’t enough:

In response to the pressure from above to make money, Messrs. Koum and Acton proposed several ideas to bring in more revenue. One, known as “re-engagement messaging,” would let advertisers contact only users who had already been their customers. Last year, WhatsApp said it would charge companies for some future features that connect them with customers over the app. None of the proposals were as lucrative as Facebook’s ad-based model. “Well, that doesn’t scale,” Ms. Sandberg told the WhatsApp executives of their proposals, according to a person familiar with the matter.

Ultimately, this whole fiasco highlights a few particular takeaways:

-If there are any victims in this situation, it is not Koum and Acton. It hurts to watch your company be meddled with, but this is a situation they had to know would eventually happen. When you hate ads as much as you do, you don’t sell to an ad-driven media platform without expecting a lot of reprecussions. Now that they’re both gone, the real victims will be the WhatsApp user base

-Facebook is still resolutely wedded to its ad-based model even through the storm of controversy it’s weathered in the past few years, and even as cracks in the viability of the model have started showing. Whether this is through genuine passion for the model on behalf of Zuckerberg and Sandberg or through profit hinges on your remembering how much money Sandberg believed advertising on WhatsApp could make.

-Targeted advertising still isn’t going anywhere. In spite of the massive backlash Facebook has faced they’re still using their status as a juggernaut to promote it, and businesses are still reacting reasonably well to it despite my own skepticism of targeted advertising on Facebook as it stands right now.

If nothing else, remember why you got into business in the first place and whether or not a direction that involves the antithesis of what your business represents is a good idea. Being billionaires probably makes it a moot point, but not everyone gets that opportunity