Facebook's WhatsApp Purchase: Reaching the Next 5 Billion Users

On Wednesday, when Facebook bought a little startup called WhatsApp for $19 billion, it was hard to understand a price tag that is larger than the market value of half the companies in the S&P 500. But a closer look at who uses WhatsApp helps to explain it.

A few months back, Facebook CEO Mark Zuckerberg gave a talk at a tech conference that foreshadowed yesterday's news. He said that while Facebook did hit its goal of connecting 1 billion users around the world, there's a lot more work to do to connect everyone else.

"Now the focus for us is actually kind of retooling — you're going to see us retooling the company in a lot of ways — to go take on a lot of harder problems that fulfill this mission," Zuckerberg said. "So, for example, connecting the next 5 billion people. It's going to be really hard because a lot of them don't have Internet access."

WhatsApp gets around that problem by using less Internet. The app rides on the coattails of traditional phone carriers, bypasses their expensive texting services and lets people send instant messages for free. Some 450 million users are on it, including technology journalist (and newly minted venture capitalist) Om Malik. He chats with his elderly mom in India — and he says she converted him to the service.

"It is one of those things that starts out as a way to save money," Malik says. "But in the end it turns out to be a social glue for all of us."

So does that make it worth $19 billion? Analyst Nathan Eagle, with Jana Mobile, explains why he thinks it does.

"Facebook is an emerging market company ultimately,” he said.

The co-founder of WhatsApp, Jan Koum, is a first-generation immigrant who grew up in an emerging market — Ukraine. That country is being rocked by political violence and bloodshed this week. Other emerging market countries, while more stable, struggle with problems like corruption and no electricity at times. But while most people focus on the current instability, some Silicon Valley giants see a future of economic promise.

"Within the next three years or so, the majority of Facebook's revenue is going to be coming from emerging markets,” said Eagle. “I mean it's certainly not coming in from North America, or Western Europe for that matter."

Jana Mobile conducted a small survey in emerging market countries and found that in India, Brazil and Mexico, people use WhatsApp way more than Facebook to send messages. So whether you call Facebook's move defense or offense, Eagle says, "They're really doubling down, and it's frankly the right call."

Analyst Rob Enderle of the Enderle Group has a different take. He agrees that there's lots of money to be made in emerging markets, but he said that WhatsApp faces major hurdles to doing so. Telecom carriers in other countries, which have to spend lots of money to build radio towers and networks, are unlikely to just give in to these low-priced products coming out of the United States.

"The carriers can always step in and say we'll just do the same thing. And you're done because they're much closer to the customer,” said Enderle. “Why would we need WhatsApp if you didn't have to pay extra for instant messaging?"

In fact, Enderle said, all the buzz from yesterday's acquisition might finally get those carriers to make a move to stave off the startup competition.