Why Did Facebook Pay $19 Billion for WhatsApp?

How much is reducing friction worth? In WhatsApp’s case, $19 billion. 

When Facebook broke records purchasing WhatsApp, the latter’s revenues were limited; there’s no way Mark Zuckerberg thought for a moment that his firm would recoup that monumental payout based on existing revenue streams alone. What made Facebook’s executives sign off on the deal?

Traditionally, businesses are valued based on a multiple of their earnings. Sometimes companies lack earnings but achieve high valuations because they have patents or other hard-to-copy advantages. WhatsApp had neither earnings nor proprietary technology.

Furthermore, it had lots of competition. Messaging is one of the most common activities on mobile devices, and many app developers have targeted those markets. So, what set WhatsApp apart and convinced Facebook to purchase it for billions of dollars? The answer is simple—it had attracted a huge number of users. None of its countless competitors came close.

WhatsApp had reached a size where the network effect kicked in. Communication apps deliver the most value when many other people are using them. Exchanging messages requires everyone to be on a common platform. Once WhatsApp pulled away from the pack, its growth was almost assured. Any user looking for a way to message friends was almost certain to choose the platform used by the most people.

Facebook could have attempted to build its own apps and exploit its own powerful network effect but doing so would have been time-consuming and costly. Furthermore, WhatsApp was already achieving widespread adoption. The company would have been busy consolidate its dominant position while Facebook was still trying to convince its users to switch. Ultimately, Facebook valued time and market share more than cash, which made the record-setting deal seem worthwhile.

How Less Friction Means More Users

How did WhatsApp distinguish itself from the plethora of other messaging apps and hook so many users? My friend Nir Eyal became a bestselling author by answering that question. Already a successful entrepreneur who had built and sold a couple of businesses, Eyal studied hundreds of products, both successes and failures, to determine why some became habits and many others didn’t. He wanted to explain why the likes of WhatsApp grew their user bases at an exponential pace while apparently similar applications didn’t.

Eyal found that while the network effect is important, it’s far from the whole story. On their path to dominance in their respective spaces, every app he studied used a somewhat similar approach to forming user habits. This model became the bedrock of his bestselling book, Hooked. In the book, Eyal explained how products become habits by using the Hooked model, a looping series of four steps:

• Trigger
• Action
• Reward
• Investment

First, a trigger (say, an e-mail promoting the product) convinces the user to try a new app. The action phase requires the user to do something, such as open the app. The reward phase delivers a benefit to the user, such as a feed that gives them a sense of being connected to friends. The investment phase builds current and long-term value when the user adds new content and engages with others.

Successful apps take the user through this phase multiple times. A post on Facebook, for example, can trigger an e-mail or visible notification when friends like or comment on it. This brings users back to the app to continue the cycle, with the user’s brain continuing to seek the rewards offered by the app. The more cycles the user goes through, the more using the app becomes a habit.

The key to triggering actions? Reducing friction. If something is difficult or confusing, people won’t do it. Have you ever downloaded an app that sounded interesting, opened it up, struggled to figure out what to do next, and decided to wait for a better time to figure it out? We all have, but that “better time” often never comes.

In these cases, the trigger has worked—you downloaded and opened the app—but you didn’t take the next step. Unless you’re highly motivated, even a little friction in the onboarding process may be enough to stop you in your tracks.

How WhatsApp Minimized Friction to Accelerate Adoption

WhatsApp was founded in 2009. By 2014, when Facebook purchased it, it had 465 million users. What enabled WhatsApp to add hundreds of millions of users in their first five years? As with most success stories, there’s no single reason. One key factor, however, was the low-friction onboarding process.

Unlike almost every other mobile app, WhatsApp didn’t require new users to create a username and password, or to provide an e-mail address. Sam Hulick, author of The Elements of User Onboarding, did a “tear-down” of WhatsApp’s streamlined process. His analysis revealed how easy WhatsApp made it to start using the app.

Users had one piece of data to enter—their phone number. In this field, the country code was pre-filled. Not only did this save a couple of screen taps, it provided information users might not otherwise know. A seemingly small addition cut down errors and prevented millions of users from scrolling through a list of countries to find the right code.

The app required two permissions, including permission to access the user’s phone contacts. In both cases, WhatsApp provided a short, clear explanation to show how these permissions would enable the app to work properly. The verification process was also ultra-simple. As soon as the user completed the signup process, WhatsApp sent a text to the phone with a six-digit code. The user entered the code or, even more simply, clicked on a link in the text.

When verification was complete, the app invited users to enter a name, upload a photo, and add contacts to WhatsApp. When Hulick underwent the process for the first time, he timed it. Even as a newbie, it took him just two minutes and five seconds—including the verification step.

Many sites and apps take far more than two minutes to fill out their signup form and create a password that met their specifications. In some cases, I’ve seen the confirmation process alone take minutes or fail on the first try. WhatsApp’s remarkably quick process enabled new users to get up and running instantly.

When new WhatsApp users invited friends to the app, those friends could get going with equal speed and few barriers to conversation. And, those new users might invite their friends. It’s easy to imagine how a quick cycle of sign-ups and invites could ricochet around a community and beyond, all in a matter of an hour or two.

Less Friction, More Users

WhatsApp’s sign-up stripped as much friction out of the process as possible. Doing so set the app on a path to rapidly attracting many more users than its competitors. Ultimately, those users were the ticket to WhatsApp being purchased for $19 billion. You may never achieve that lofty valuation, but you can emulate WhatsApp's success by minimizing friction in your own onboarding process and customer experience.

For more advice on the value of reducing customer effort, you can find Friction on Amazon and Audible.

References

Contributor. (2012, April 09). Facebook Buys Instagram for $1 Billion, Turns Budding Rival Into Its Standalone Photo App. Retrieved February 14, 2019, from https://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/

Covert, A. (2014, February 19). Facebook buys WhatsApp for $19 billion. Retrieved February 14, 2019, from https://money.cnn.com/2014/02/19/technology/social/facebook-whatsapp/index.html

Roger Dooley is an author and international keynote speaker. His books include Friction: The Untapped Force That Can Be Your Most Powerful Advantage and Brainfluence: 100 Ways to Persuade and Convince Consumers with Neuromarketing. He writes the popular blog Neuromarketing as well as a column at Forbes.com. He is the founder of Dooley Direct, a consultancy, and co-founded College Confidential, the leading college-bound website.