SILICON VALLEY -- Facebook is shelling out big bucks to acquire the fast-growing provider of a free mobile messaging application out of a fear that the rise of smartphones could cost it a lead built up in the personal computer era.
The world's biggest social networking service will spend $19 billion to purchase WhatsApp. When the deal was announced, analysts pondered why Facebook was paying such a hefty sum -- more than the market capitalization of NEC or Rakuten -- to buy a startup that has been around for just five years and employs just over 50 people.
WhatsApp has 450 million users. Although Line may be more well-known in Japan, WhatsApp is the world's leading mobile messaging application. Instead of displaying advertising, it generates revenue from the 99 cent annual fee it charges users starting in the second year.
WhatsApp has grown at a breakneck pace, having gained considerably more users in its first four years than Facebook and Twitter did. About 1 million new users still sign up every day. And seven out of 10 users are on the service daily, a greater share than Facebook's 60% or so.
Facebook's users topped 1 billion in 2012, eight years after its launch, and had reached 1.23 billion at the end of last year. Still, many analysts had predicted that it would be just a matter of time before WhatsApp became a threat to Facebook.
Smartphone contact lists are the secret to WhatsApp's rapid growth. When the app is downloaded and run for the first time, it asks for permission to access the user's contact lists. It then shows all friends, family members and others on these lists. An icon is displayed under the names of fellow users to indicate whether they are available to chat. And invitations to join WhatsApp can be sent with one click to others.
This setup is similar to Line's. But the U.S.-developed app spread quickly in English-speaking regions and also caught on in emerging markets with large populations, such as Brazil and Indonesia.
Using customers' relationships to boost sales of goods and services is a basic business practice. But in the past, understanding people's connections was no easy task. A smartphone address book reflects the user's "social graph": the network of connections and relationships between people.
David Kirkpatrick, author of "The Facebook Effect," says smartphone apps can instantly acquire the social graphs that Facebook took years to gather. Facebook's dominance established in the PC days could be shaken, he argues.
But while accessing contact lists offers an easy way for an app to expand its user base, a mistake can quickly drive people away. The Path social networking app, which debuted in 2010, came under fire for accessing users' address books without permission. The developer was forced to apologize for privacy violations and had to change the program.
As the main social networking platform shifts from PCs to smartphones, another application like WhatsApp could appear on the stage by tapping users' contact lists. A user base of hundreds of millions could be turned into a market for goods and services. Rumors that companies are seeking to buy Line pop up because the potential for mobile messaging apps is so large.
Although Facebook appears to have secured its dominant position in the social networking industry, the lofty price it is paying for WhatsApp shows that the industry landscape is far from stable.