The big news in not just the tech industry, but all of business was Facebook’s intention to buy the startup WhatsApp for $19 billion in cash and (mostly) stock.  Much of the press noted that given WhatsApp has only 55 employees, that the buyout totalled $345 million per employee.

It’s a very large sum and a very high price.  What is Facebook getting?  Well there are the 450 million users of WhatsApp and that’s no small number of users.  It is certainly credible to say that WhatsApp is on the way to a billion users, but is that enough?

WhatsApp has gotten popular by disintermediating text message operators, who are the mobile network operators.  It’s been estimated that users of WhatsApp have saved $33 billion on text messages, or to put it another way the mobile network operators have lost $33 billion of text message business to WhatsApp.

Of course users would not have sent so many text messages if WhatsApp hadn’t effectively made them free, still the mobile operators are now losing text message revenue and WhatsApp just made a bundle through a buyout.  What is the sustaining business proposition?  Ads with the text messages?  Maybe.

Facebook is trying to stay one step ahead of the next hot thing by co-opting when they can and buying it out when they must.  Growth through acquisition is the usual path for the market leader, so this is not unusual — think Microsoft buying Hotmail.  Facebook tried their own Messenger functionality, but did not achieve the market traction that WhatsApp got.

So Facebook is showing chutzpah, an aggressiveness to make sure it’s the most important business in the mobile application market.  Instagram was acquired for a now seemingly paltry $1 billion in 2012.  Facebook wrote a check 19 times bigger, but really only spending $4 billion of cash and the rest in stock.  Can this big fish eating little fish attitude work?  Certainly it will work until it doesn’t.  When it stops working is when there is a new paradigm shift.  No one will be outcompeting Facebook with an imitation, only by coming up with something completely different is there a chance of beating Facebook.

Last November Facebook offered $3 billion for Snapchat, but was turned down.  Snapchat represents the kind of threat Facebook is on the prowl for.  A service different than Facebook’s offerings, but also very popular.  There is kind of a circling of vultures around the death of expensive mobile operator-based text messaging right now.  Social networks like Twitter and Facebook address some of that same market, but many users want a more private conversation hence the popularity Snapchat and WhatsApp.

It’s doubtful that a single app or service will dominate all of text messaging and frankly if one did, then mobile operators would start to push back against that single point of revenue theft from their business.  With cellphones really becoming handheld computers with Internet ability, almost any application could become a text messenger today using XMPP standard for interoperability.  So if a mobile operator tries to stick a finger in one popular app, another one will spring up, like holes in a leaking dam and the mobile operators won’t have enough fingers to plug all the apps.

App stores aren’t even controlled by the mobile operators anymore, but by Google, Apple and Microsoft.  The decline of the carriers to dumb bit pipes was ensured by the iPhone in 2007 when Apple got unprecedented control over the mobile device and software.  That market explosion has lead to the rise of the power of mobile device software providers, think iOS, Android and Windows Phone.

That yanking of power from the mobile operators meant that apps will now circumvent all premium services the mobile operators provide, except basic connectivity.  So the carriers will continue to be commoditized and apps will continue to proliferate and the big fish like Facebook will continue to get bigger.

Bottom line: spending $19 billion for a company with 55 people and 450 million users was a good move.

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