Facebook is spending about 10 percent of its market value to purchase the rapidly-growing message service WhatsApp, betting the $19 billion in cash and stock deal will help it gain a stronger presence in foreign regions like Brazil, South Africa and Indonesia.
Facebook is already the top messaging application in the U.S. after 10 years online, but CEO Mark Zuckerberg has global ambitions and WhatsApp is the partner that will help it grow internationally, even if it still needs time to create more ways to generate revenue from its users.
WhatsApp is a cross-platform messaging application that allows text, video and photo messaging to users without having to pay SMS phone texting fees. WhatsApp is available on Android, iPhone, BlackBerry, Windows Phone and Nokia. It costs users only $1 per year, after the first year which is free, and the service has no advertising.
WhatsApp is on the path to connect with 1 billion people in the next few years, as more than 450 million people use the service every month and the company adds more than 1 million new registered users each day. It also has a loyal user base as 70 percent of its users are active each day, an activity rate that surpasses Facebook, Zuckerberg said during a conference call on Wednesday.
“It doesn’t get as much attention in the U.S. as it deserves, because its community started off growing in Europe, India and Latin America,” Zuckerberg said of WhatsApp. "As Facebook works to connect the entire world and to build the infrastructure for global community, WhatsApp will clearly help accelerate our progress."
Former Yahoo engineers Jan Koum
and Brian Acton founded WhatsApp in 2009. Koum, the CEO of the messaging
service, has known Zuckerberg for several years and will become a member of
Facebook’s board of directors as part of the deal as he operates WhatsApp independent of the social network. Koum said during the call that ads are likely not coming to the messaging service but new features will be added to WhatsApp within 12 months.
“We feel that we actually have a very solid monetization system in place that helps us create a direct relationship with our user and our customer,” Koum said. “WhatsApp really focuses on growth. Monetization is not going to be a priority for us.”
WhatsApp’s rapid growth has made it the top mobile messaging service in three major emerging markets including Brazil, South Africa and Indonesia, according to Nov. 2013 data from tech industry research firm eMarketer.
Facebook now makes more than half of its money from advertising to its mobile users as the company is pushing to adapt since the mobile market is outpacing the growth of desktop use. The market is also changing as messaging services including WhatsApp and Line are outpacing text messaging on traditional telecoms, says Catherine Boyle, a mobile analyst at eMarketer.
“Instant messaging and chat apps are starting to pull people away from text messaging on telecoms since many of them are free, or they don’t have advertising and have a subscription model,” Boyle says. “The telecom industry is very aware of this and companies are starting to develop their own over-the-top messaging applications.”
Facebook is thinking long term by getting the users first and planning monetization later, says Brian Blau, research director on consumer technologies at Gartner, a technology research firm.
“Facebook is going to benefit from knowing who the WhatsApp users are, where they are, and what they are doing, much the same way data is collected from core Facebook users,” Blau says.
WhatsApp has grown faster during its first four years than the first four years of growth experienced by mobile messaging services including Google's Gmail, Skype, Facebook Messenger and Twitter, according to data from Facebook. The social network could monetize those users in the future with services including e-commerce, various kinds of advertising and even business enterprise services, Blau says.
Facebook in 2013 bought Parse, which is a tool for developing mobile apps, so WhatsApp could help Facebook diversify its mobile services for consumers and businesses, Blau says.
The mobile space has such value that Google reportedly offered to buy WhatsApp for $10 billion, sources tell Fortune. That would make sense because Facebook is taking a page out of Google’s book by purchasing new services that diversify its range of products, Blau says.
Forward thinking or not, some experts say the $19 billion purchase of WhatsApp is overvalued because of an Internet stock boom and a rush to search for the next big thing, including Karsten Weide, a media analyst at International Data Corporation, a tech industry research firm.
“A bubble deal if ever there was one,” Weide says. “There is no way a texting app company
with  employees is worth [$19 billion].”