WhatsApp Innovation – How Innovative Should Your Innovations Be?

The tech world is currently abuzz with the news that Facebook is buying WhatsApp for $19 BILLION dollars ($16B in cash and stock for the company + $3B in stock incentives to keep the ~50 employees around).  Not only is it the largest ever acquisition of a venture capital backed startup, but unlike most venture backed companies, only one VC has been involved in the funding, Sequoia Capital.  Given the price of the acquisition, the $58.3M in total funding seems paltry.  It’s a huge win for Sequoia.  They stand to make around $3B off the deal (over a 50X return just three years after they invested $8M and 7 MONTHS after adding an addition $50M).

So, it MUST be that WhatsApp is some sort of super innovative, world changing technology right?  What is it that 450M people have downloaded and ~70% of its users use daily?  What is WhatsApp innovation?

It’s an SMS clone!  It’s text messaging.  It’s a feature that basically every cell phone already has pre-installed on it.  Oh, but it also has a lot of different smiley faces and emoticons :).

In fact, Facebook already has it’s own, very similar App, Facebook Messaging.  And in addition to your phone service’s SMS offering, Skype, Viber, WeChat, Google HangoutBlackberry Messenger, and numerous others all offer essentially the same service.

So, what’s up with WhatsApp, how in the world can a SMS clone be worth $19B?

I’m not going to try to refute or defend the valuation nor Facebook’s reasoning for making the acquisition, that will be the subject of many, many, MANY articles for months, and probably years, to come.  But I am interested in WhatsApp from an innovation standpoint.  Just how innovative is WhatsApp as an SMS clone?

For many years, Blackberry’s Messenger platform has been very popular, some saying it is the most valuable part of the company at this point.  BBM lets Blackberry users send messages between Blackberry devices for free, bypassing the phone carrier and any charges that might be incurred for sending text messages.  When I first started using SMS, my carrier charged $.10 per text message sent or received.  Or, I could buy a package of messages, I used to pay $5 a month for more texts that I would use.  However, I was not a power user, I only sent or received a couple texts per day.  For people that used texting a lot, the fees could be very high.  So for companies that used a lot of texting, BBM was a great feature.

However, in the US, most carriers are moving to “all you can eat” phone and texting plans (i.e. unlimited) and charging for how much data phone users use (and apps like WhatsApp use the data network).  However, in other countries, users often “pay per use” (often a charge for each message sent), making apps like WhatsApp very appealing.

And, indeed, I first started using WhatsApp while attending a global MBA program with students from all over the world.  While my phone plan allows for unlimited texting to US phone numbers, I am charged extra to text International numbers.  So, WhatsApp offers a free way for me to text with all my International friends, very compelling, and certainly worth the $1 a year WhatsApp intends to charge its users.

In addition, my fellow students all had different types of phones.  Until recently, BBM only worked on Blackberrys.  We have people on Blackberrys, iPhones, numerous different Android devices, and someone might even have a Windows Phone (although I don’t know who, they wouldn’t admit it if they did).  Being cross platform, WhatsApp was much more compelling than BBM for this group.

In addition, WhatsApp make is very easy to setup groups so that you can send one message that goes to the entire group.  This is something SMS has never been very good at, simply sending a single message to multiple recipients still isn’t always smooth with SMS (what happens when someone replies, does it go to the group or just to the sender?).  WhatsApp was a nice solution for sending group messages about things like where we were all going for dinner, what time were we hitting the bar, where exactly is that file needed for the homework located, and where should we go for our class graduation trip.

WhatsApp also has a very strong security and privacy policy, something that is getting a lot of attention these days with the Edward Snowden revelations.  WhatsApp messages are deleted from the company’s servers soon after they are sent (unlike SMS messages which are saved by the carriers).  This stemmed from the fact that one of the co-founders grew up in communist Ukraine (part of the USSR at the time) in an environment of constant spying and snooping.  This is another major advantage for international use where the close relationship between the telcos and the government (in many countries they are still one and the same) can be worrying.

So, is WhatsApp, the SMS clone, really innovative?  My scorecard says:

1) Cheaper pricing
2) Cross-platform
3) Breaks down the International barriers of the incumbent platform
4) Facilitates easier group messaging
5) Lots of fun emoticons

Apparently, this was enough to get 450M people “actively” using it.  That’s compared to around 240M active monthly users on Twitter.  Currently Twitter has a $30B market cap and last year brought in around $450M in revenue.  If WhatsApp can charge each of its users $1/year…well, maybe Facebook just got a bargain?!?!?!


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