SAN FRANCISCO – The rivalries among the tech industry’s giants have often resembled a “Game of Thrones,” in which companies such as Facebook, Google, Amazon and Apple constantly try to invade one another’s online kingdoms. On Wednesday, Facebook took a dramatic step to defend its turf, saying it would pay $19 billion for WhatsApp, a messaging service that had also attracted the attention of Google and almost certainly other suitors.
Even veterans of Silicon Valley goggled at the staggering sum of money changing hands, which comprises a mixture of cash and shares in Facebook. WhatsApp’s price tag is the most ever paid for a venture-capital-backed company and gives a start-up founded in 2009 a valuation that is greater than that of household names such as Southwest Airlines and Sony.
The deal marks the coming-of-age of messaging apps, which let people send text messages and share photos and other stuff without incurring charges from telecoms firms. WhatsApp is free to use for 12 months and then costs a mere 99 cents a year. Plenty of other such apps have sprung up, including Viber, which Rakuten, a Japanese Internet giant, recently bought for $900 million and the immensely popular WeChat, which belongs to Tencent, an innovative Chinese company.
All of them have benefited from two profound trends that are transforming the technology landscape. The first of these is the rapid growth of Web-connected smartphones, which has allowed WhatsApp and its rivals to spread like wildfire. Announcing the deal, Mark Zuckerberg, Facebook’s boss, said WhatsApp had reached 450 million users much faster than any other Web service. It has also made itself addictive: 72 percent of its users are active on it every day. And the viral nature of its appeal means it has achieved all this without spending a penny on marketing.
Casual-gaming apps are also spreading rapidly on mobile devices. King.com, which filed for an IPO in New York on Tuesday, is a case in point. The company, which makes the hit game “Candy Crush Saga,” saw its monthly active users soar from 67 million in the fourth quarter of 2012 to 408 million in the same period last year. Its revenue soared, too, hitting $1.9 billion last year compared with $164 million in 2012.
The second trend behind WhatsApp’s success is the dramatic decline in the cost of building start-ups. Thanks to things such as cloud computing, which lets young firms buy vast amounts of cheap computing capacity, entrepreneurs can create globe-spanning businesses on shoestring budgets. WhatsApp has just 32 software engineers, which means that each one supports some 14 million users. And the volume of messages it is handling is said to be the equivalent of all the SMS messages transmitted by the world’s telecom companies.
Indeed, WhatsApp’s success in many ways mirrors that of Facebook itself, which came from nowhere to dominate social networking.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.