Follow the photos: The real reason Facebook just paid almost 10% of its market cap for WhatsApp

By Sarah Lacy , written on February 19, 2014

From The News Desk

So you thought $1 billion for Instagram was crazy.

And then you thought $3 billion for Snapchat was insane.

Today Facebook has announced that it is acquiring WhatsApp for a whopping $16 billion, plus $3 billion in restricted stock units. The shock is similar to when Google bought YouTube for a then-unimaginable $1.65 billion-- just move a decimal point and almost a decade.

Such is the state of valuations in Silicon Valley. It takes an order of magnitude like this to shock us anymore in a world where startups shrug at the $1 billion valuation club and have only really made it when they’ve joined the $3 billion valuation club.

Today Facebook proved that even those of us who’ve accepted the “new math” of growth company valuations can still be scandalized.

Truth is, though, scandalous company valuations have long been Facebook’s stock in trade. When it was valued at $100 million in 2005, that was scandalous. When Microsoft invested in the company at a $15 billion price we lost even more monocles. The only time one of those valuations appeared to be actually wrong was when the company IPO’d -- but even that turned out to be just a hiccup. Facebook’s stock has recovered mightily since trading at $42 the opening price everyone balked at.

Facebook has always paid that inflation forward in everything it does. Call it Zuck-opoly money. It’s almost as if there’s a currency exchange office in the lobby of 1 Hacker Way, next to the security check-in desk. $1 magically becomes $100.

The mo’ money, no problem attitude isn’t just limited at valuations. In 2006, Facebook was the only startup that had furniture from Design Within Reach-- rather than startup staple Ikea. And Facebook was the biggest spoiler in the Techtopus Silicon Valley wage-fixing plot, reported here on Pando by Mark Ames. While other Valley companies conspired to keep wages artificially low, Facebook had no issue bidding mightily for talent, forcing wages to rise across the industry. Facebook also revived the late-1990s Cisco habit of swallowing companies whole just to get their talent-- jump-starting the recent years’ acquihire boom. And, of course, with the $1 billion Instagram deal, Facebook was the first to put a $1 billion price tag on a mobile-first company that was less than two years old.

Facebook is like a reverse Amazon. If Amazon squeezes out prices through efficiencies and passes on the savings to everyone else; Facebook sucks in cheap capital through high valuations and spreads the inflation to the rest of the Silicon Valley machine.

But the Whatsapp deal is still something else. Even with all of Facebook’s trademark largesse, no one has come close to getting this level of Zuck-opoly money before. Ignore the actual dollar price. The shocking number is this: WhatsApp is worth an astounding 9.2 percent of Facebook. Nearly 10 percent of a company that plays an integral role in more than 1 billion people’s social lives. Nearly 10 percent of the largest Internet company of the Web 2.0 wave.

Compare that to transformative acquisitions done by Google-- arguably the most important Internet company of the Web 1.0 wave. YouTube was a comparatively paltry 1.3 percent of Google’s market cap. Android was only 0.08 percent. Even Instagram which both made Facebook hot on mobile and served Twitter the greatest business cock-block in recent memory was only about 1 percent of Facebook’s market cap. Snapchat-- which has mobile juice and teens and represents everything Facebook is not -- was “only” deemed to be worth roughly 2.5 percent of Facebook.

How could WhatsApp be that much more important to the future of Facebook?

There are a few theories. One is that Facebook craves WhatsApp’s global audience. But in my experience, Facebook has never struggled to dominate globally nor has it ever cared much about rushing monetization of all those global eyeballs. A few years back, Indonesia became its number two market, and it took years for the company to even send someone to check Indonesia out. Sure, there was a battle of pride to push Orkut out as number one social network in Brazil. So maybe international is more important to Facebook than it was a few years ago. But its hard for me to believe it’s $16 billion kinda important.

The sheer size of the audience is impressive -- some 450 million with 70 percent logging in every day according to the company. Zuckerberg said on the conference call announcing the deal, “No one in the history of the world has done that before” in the space of just five years. But as the mobile web continues to expand, won’t all records increasingly be broken?

Another theory is Facebook’s much discussed teen problem. While WhatsApp users are likely younger, you have to be 16 to sign up, versus 13 on Snapchat or Facebook. And teens are notoriously fickle. Paying 10 percent market share just to get an audience that may migrate tomorrow makes Zynga’s $210 million purchase of OMGPop look well thought out.

A third theory could be that despite Facebook’s recent moonwalking around how it has solved its mobile problem, the company is still scared. Mobile is already 53 percent of Facebook’s ad revenue business, and that percentage is growing. Facebook’s future depends on  them staying in front of what mobile users want.

But Facebook “chasing mobile users” is too general a justification for today’s deal. My take on why Mark Zuckerberg needed WhatsApp, at any price, is much simpler, and much more specific.

Three words: Follow the photos. It’s not just that Zuckerberg noted on the call today that WhatsApp is on a clear path to be a company with 1 billion users. That is, a company with 1 billion users with a high percentage returning daily and engaging principally around photos.

Sound familiar?

Facebook has grown into such a huge thing that we forget what the core always was: Photos. This was the reason Instagram was such a threat to its dominance. It was the next social network where the primary organizing and viral mechanism was photos. That’s why Facebook had to own it.

And guess who is the new photo leader according to recent numbers? WhatsApp. According to the company’s own numbers, WhatsApp is processing 500 million images per day, compared to 400 million Snapchat (“snaps”) per day, which could include photos or videos. For its part, Facebook processes a comparatively paltry 350 million photos a day, with an additional 55 million per day from Instagram.

Facebook has become the world’s most dominant, and resilient, social network by ensuring that it “owns” photos. Today’s purchase shows they’re determined to maintain that dominance whatever the cost.

Once upon a time the CEO of Yahoo tried to nickel and dime Mark Zuckerberg on how much a young Facebook was "worth." The result of Yahoo's slight was the largest online ad competitor it could ever imagine. Zuckerberg is careful not to repeat the same mistake. While a lot of CEOs at his level convince themselves that no one else could possibly recreate what they've done, Zuckerberg well knows how someone could build the next Facebook and knows that the mobile Web has given them the inflection point. Better to give up 10 percent of his company than the crown.

With additional reporting by Carmel DeAmicis.

[Image credit: Brad Jonas for Pando]