The Case Against Facebook’s Acquisitions

Facebook owns the world.

Given the company’s huge growth and the media controversy that has surrounded it over the last year, you’d be forgiven for thinking so. And you wouldn’t be far off. There are only a handful of platforms with more than a billion users in the world, and Facebook owns three. There’s Facebook proper, then there’s Messenger and WhatsApp. And within the next year or two, Instagram seems bound to join the “three comma club,”  given that the platform surpassed the 800 million mark near the end of last year.

Each of these platform businesses depends on one engine for monetization: ads. If Facebook runs the world, then the world runs on ads. Last year, Facebook earned just shy of 20% of all ad digital revenue in the United States, and ads accounted for 97% of the company’s revenue. At this point, ads so dominate the Internet experience that it’s hard to imagine any other m odel. But it didn’t have to be this way.

The Anti-Facebook

Go back a few years and a viable alternative looked like it might emerge. That hope was embodied in WhatsApp, the messaging platform that had grown from zero to nearly 500 million users in less than five years.

WhatsApp was very different than Facebook. Its original value proposition was very simple. At a time when SMS was relatively very expensive in the developing world, WhatsApp offered free messaging using your existing data plan. It was, in essence, a form of economic arbitrage against the outdated models of many telcos.

How, then did WhatsApp make money? It wasn’t through ads. The company’s founders openly disavowed advertising. In a 2012 blog post titled “Why we don’t sell ads,” the company’s founders wrote, “No one wakes up excited to see more advertising, no one goes to sleep thinking about the ads they’ll see tomorrow…Advertising isn’t just the disruption of aesthetics, the insults to your intelligence and the interruption of your train of thought.”

 “Remember, when advertising is involved you the user are the product,” they warned. For WhatsApp, “Your data isn’t even in the picture. We are simply not interested in any of it.”

Instead, after the first 12 months of use, WhatsApp would charge users a $.99 annual subscription fee. This decision led many to question how sustainable WhatsApp’s model was. However, for a company that had less than 100 employees, this money kept the lights on and helped fuel its meteoric growth. The company was profitable, if not by much.

WhatsApp was going to be the anti-Facebook.

The Facebook Singularity

But that’s not what happened.

In February 2014, Facebook bought WhatsApp for $21.94 billion. Its notoriously anti-advertising founders joined one of the largest advertising companies the world has ever seen.

At the time, Facebook promised that it would let WhatsApp be WhatsApp. It wouldn’t force the Facebook model on its new messaging platform. That, of course, isn’t what’s happened. In 2017, the EU fined Facebook $122m for providing “incorrect or misleading” information about its intentions at the time of the acquisition. Facebook had started taking user data from WhatsApp, such as phone numbers, and matching that up with Facebook accounts to create a unified profile in the background. Facebook responded that it had made “errors” in its 2014 filing with regulators.

Then, this year came the death knell for WhatsApp’s dream. The last of its founders, Jan Koum, announce that he would be leaving Facebook come August. WhatsApp’s other founder, Brian Acton, had left earlier in 2018.

The move was startling given how much money both men left on the table. While the original acquisition had made both fabulously wealthy, Acton left a reported $900 million in stock awards on the table, while Koum will miss out on some $400 million. What’s more, if the two had just stayed till November, they would have kept that money. Acton even promoted the “#deletefacebook” campaign on Twitter during the height of this year’s Cambridge Analytica scandal, and he donated $50 million to Signal, a rival messaging app focused on encryption that is run by a nonprofit foundation.

What drove them away from Facebook? According to reporting by the Wall Street Journal, the answer is Facebook. The platform giant’s ad model has slowly been seeping into WhatsApp over the last few years, despite the loud objections of WhatsApp’s founders and many of its employees.

WhatsApp’s founders proposed a number of ways to make money, but were repeatedly told by Facebook executive Sharyl Sandberg “that doesn’t scale” the way Facebook’s ad-based model does. She pushed them to adopt Facebook’s ad tech the same way Instagram had. Facebook CEO Mark Zuckerberg also pushed WhatsApp’s founders to loosen the platform’s encryption to become friendlier to businesses, a move that the latter two resisted. Acton decided to leave right as Facebook was discussing how to place ads in WhatsApp’s Status feature, its version of Snapchat Stories.

As we’ve written previously, the results are now predictable. WhatsApp is slowly becoming like Facebook’s other messaging platform, Facebook Messenger, in a quest for revenue. It’s already introducing features that Messenger has long had, like payments and business-specific messaging features. This is the final step in the Facebook Singularity, in which all four soon-to-be billion user platforms fuse into one, integrated advertising business. While WhatsApp and Messenger aren’t likely to actually merge, they are, effectively, one model.

The Platform Conglomerate

Where there were two viable models, now there is one.

That’s the ultimate result of Facebook’s WhatsApp acquisition. Facebook bought the messaging startup because it saw a potential threat. A billion-user-plus platform with a strong adherence to privacy and a non-ad-based business model would have presented a real alternative to Facebook. No longer.

This acquisition was very different from Facebook’s acquisition of Instagram, which at the time was relatively small and was already testing its own ad-based model. Instagram grew to what it is today on the back of Facebook’s ad infrastructure and its network. It’s easy to make the case that Instagram would not be nearly as successful if it hadn’t been acquired.

WhatsApp was very different. It was already well on the path to a billion users and had a business model that was sustainable, if not hugely lucrative.

Facebook today isn’t just one platform business, it’s a series of interlocking platforms with overlapping network effects. As we wrote in Modern Monopolies, it is in effect a platform conglomerate.

All major platform companies head in this direction, including Amazon, Apple, Google, Alibaba, Baidu and Tencent. They attempt to build new platforms that extend to adjacent networks or new platform types. For example, Facebook’s social network added Instagram, a content platform, and Messenger and WhatsApp, both messaging platforms. Google added YouTube, another content platform in addition to Search, and Android, a development platform.

Governing the Modern Monopolies

There are two rationales here for the growth of platform conglomerates. One is accretive – moving into a new platform type or a new business model as a way to diversify revenue and build interlocking network effects. The other is defensive – buying potential threats to your existing core platform. Facebook’s WhatsApp acquisition certainly fits into the latter.

WhatsApp represented the foundation for a viable alternative to Facebook. Without an independent WhatsApp, there appears to be none. From a regulatory point of view, then, allowing Facebook’s WhatsApp acquisition was a big mistake.

While modern monopolies like Google or Facebook will naturally grow to dominate their core markets, we should look carefully at what they’re doing as they make acquisitions that extend into new ones. If they are simply choking off the competition, then there’s a strong reason not to allow the move.

Properly harnessed, modern monopolies can be a boon to society and the economy. But to achieve this, governments and regulators need to understand how these platforms work and how they grow. With the WhatsApp acquisition, they failed to do just that. If advertising is the “insult to our intelligence” that WhatsApp’s founders claimed – well, now we have no real alternative. Facebook owns the world, even though it didn’t have to.

Originally appeared in Inc Magazine

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