Facebook has just agreed to shell out $16 billion in a cash and stock deal to acquire the messaging service WhatsApp -- 16 more times than it first agreed to pay for Instagram.
The reason that Facebook was willing to spend so much more boils down to a single but sprawling thing: WhatsApp's global user base. Though the app is still somewhat under the radar in the U.S., it said in December that it has 400 million monthly active users, and Facebook said Wednesday that the figure was now 450 million, 70% of whom are active on any given day.
Nineteen billion messages and 600 million photos are sent daily on WhatsApp, said its CEO, Jan Koum, during a conference call Wednesday. Mr. Koum will join Facebook's board.
The scale is impressive -- five months ago Instagram said it had 150 million monthly active users -- but it also means Facebook is now willing to spend $36 per active user to extend its reach among young people.
Maintaining high levels of user engagement is key for Facebook as it enters middle age, and messaging apps like WhatsApp, Line, KakaoTalk and Snapchat -- which Facebook tried but failed to acquire for $3 billion late last year -- are chipping away at its share of people's attention.
The acquisition is part of a long-term strategy to acquire some of those social and mobile competitors. But it's not clear whether the deal will do much to address teen engagement, which Facebook has admitted is a problem for it in the U.S. The service is broadly used as a stand-in for SMS texting in countries such as Spain and the Netherlands.
Asked by an analyst about the age of WhatsApp users, Facebook CFO David Ebersman remained a bit vague. "If you look at the penetration that WhatsApp has achieved, it goes without saying they have good penetration across all demographics, we'd imagine," he said. "But it's not a service that asks you to tell them your age when you sign up."
Facebook CEO Mark Zuckerberg touted the high engagement on WhatsApp -- which allows users to send photos, videos and audio recordings in addition to text -- during the conference call Wednesday. He said that he expects WhatsApp to reach a billion users.
Hear from Fortune 500 brands that have been forced to pivot as consumer preferences evolve, as well as entrepreneurs building brands from scratch to meet new consumer needs. This event peels apart the layers of brand building with a carefully crafted roster of top marketing, technology, and creative leaders.Learn more
"WhatsApp is the only widely used app we've seen that has more engagement and a higher percentage of people using it daily than Facebook itself," he said.
He noted that Facebook has invested deeply in mobile messaging products like Facebook Messenger, a standalone app, but that it's not used for real-time conversations as an SMS stand-in the way that WhatsApp is.
"We're going to invest in both to serve both use cases," Mr. Zuckerberg said.
WhatsApp generates revenue on a subscription model by charging users 99 cents per year after an initial year free. It has previously eschewed advertising in no uncertain terms.
The company wrote in a blog post in 2012: "Advertising isn't just the disruption of aesthetics, the insults to your intelligence and the interruption to your train of thought ... when advertising is involved, you the user are the product."
Users can expect WhatsApp to remain ad-free, according to Messrs. Zuckerberg and Koum, who said that the strategy for the foreseeable future would be to focus on product and user growth.
"I don't personally think ads are the right way to monetize messaging," Mr. Zuckerberg said.
Mr. Koum reiterated that WhatsApp -- which will continue to operate independently -- will not focus on revenue sources beyond its existing model. "We have the potential to have 5 billion users giving us money through the subscription model," he said.
The deal is composed of $12 billion in Facebook stock and $4 billion in cash. An additional $3 billion in restricted stock units are being set aside for WhatsApp's 50 employees and will vest over a four-year period.