Why the Facebook acquisition of WhatsApp is BAD

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It came out yesterday that Facebook wants to buy WhatsApp, a well known instant messaging client used around the world. Let me count the ways this is a terrible thing.

Not buying users. The amount of overlap between WhatsApp users and Facebook users is going to be absolutely gigantic. However it isn’t about buying more users, it’s about buying their data. In many countries, SMS (text messaging) is not unlimited on their cell phones, however data access is far cheaper than most mobile carriers here in the United States. People around the world use WhatsApp as a replacement for text messaging. Zuckerberg’s post says that they sign up 1 million new users every day, and one article posited a half a billion messages every day were transmitted through WhatsApp. That is a lot of text messages to harvest data from.

Kiss your privacy goodbye. One of the appealing things about WhatsApp was that they delivered messages from device to device, then deleted messages from their servers. Facebook doesn’t even delete user data when users ask to be deleted from the service! You can bet the terms of service and your privacy expectations are going to have to change once Facebook takes over. If they aren’t “buying users” they are obviously buying data, and will need to change the terms of service to allow them access to that data.

16-19 Instagrams!? Since the one billion dollar acquisition of Instagram, I have been comparing every valuation I see in terms of Instagrams. 16 billion dollars for a lot of user-overlap and some text messages? I’m not sure what Facebook intends to gain from this, but simply put, they overpaid.

The dangers of overpaying: Facebook is creating the next tech bubble with their over-inflated acquisitions. Although WhatsApp has proven to have reasonable longevity and continues to grow, nothing lasts forever, especially when it comes to businesses on the Internet. The talent acquired in the WhatsApp team was not enough, the expected amount of user-overlap leaves much to be desired, and the fact that monetizing WhatsApp is difficult (right now WhatsApp charges $1 for a year of access to their service, after a user’s first free year has passed).

Facebook’s shareholders can’t be happy. When Zuckerberg went ahead with spending one billion dollars on Instagram mere days before Facebook’s IPO, it made investors nervous. The company just gave a huge chunk of money to an app that was in no way a threat to Facebook and, once again, had a lot of user-overlap. That rattled people. But to pay more than 8 times the value of IBM’s low-end server business for a peek at what people are texting? My theory is that Zuckerberg was making take-over offers and WhatsApp kept rejecting, but Zuck refused to take “no” for an answer. Even though he still owns the majority and can act without shareholder input, a move like this could make investors nervous and cause them to reconsider the risk in their holdings.

It just seems to me like Facebook is making some decisions that have more far-reaching implications than even they understand, right now. The large acquisitions are hurting them in the eyes of investors who think Zuckerberg is mismanaging company resources and overvaluations in their purchases are causing inflation in the tech sector, which isn’t good for anyone. In time we’ll see if it’s a splash or a tsunami, but Facebook is certainly making waves.

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