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Facebook Chief Executive Officer Mark Zuckerberg smiles onstage before delivering a keynote speech during the Mobile World Congress in Barcelona February 24, 2014. (ALBERT GEA/REUTERS)
Facebook Chief Executive Officer Mark Zuckerberg smiles onstage before delivering a keynote speech during the Mobile World Congress in Barcelona February 24, 2014. (ALBERT GEA/REUTERS)

STRATEGY LAB

Zuckerberg may have made a brilliant move with WhatsApp deal Add to ...

Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

Last week, Facebook Inc. made a very big decision. CEO Mark Zuckerberg’s decision to acquire WhatsApp, a mobile instant messaging app, for $19-billion (U.S.) has huge numbers of industry observers questioning his level of sanity and intelligence. But depending on what they do with the acquisition, it could prove to be a brilliant deal that completely redefines mobile communication and generates huge profits for Facebook.

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To understand why so many people are shocked, one needs only to look at Facebook’s previous major acquisition. They paid $1-billion to acquire photo sharing app Instagram. Looking only at price and not digging any deeper, the $19-billion price tag for WhatsApp seems crazy. It was also popular opinion that Instagram was also too expensive. It’s only natural for people to look at the WhatsApp deal and conclude that Mr. Zuckerberg has lost his mind if he’s paying nearly 20 times as much money for a five-year-old mobile instant-messaging company that brings in very little revenue.

I’ll admit the price tag shocked me too. But once I had a chance to think about the deal and consider its long-term potential to change Facebook’s future, I realized Mr. Zuckerberg could be making a brilliant move. It’s quite clear to me he’s thinking about the next decade or more, while most short-term-minded investors suffer from tunnel vision locked onto today’s revenue.

In the next decade, I think the majority of the world will stop using SMS, otherwise known as text messages, and shift to data-oriented messaging programs on their smartphone. Facebook’s goal should be, and appears to be, to own this market. There is no global standard today, so Google, Apple, BlackBerry, WhatsApp and others compete with each other just like the classic example of VHS versus Beta in the early VCR market.

WhatsApp is huge. It has 450 million monthly active users, and 70 per cent of these users are active on any given day. They are growing at one million new users per day, so they could reach over a billion people within a couple of years. According to Facebook, the WhatsApp network carries almost as many messages as the global SMS market.

I also think this goes far beyond instant messaging. I believe the mobile communication industry is set to have one dominant application for text, voice and video. WhatsApp will be bringing voice messaging to its platform later this year. Facebook isn’t just betting on texts: I think they’re making a play to dominate all forms of communication on mobile devices. Since WhatsApp is already huge, the network effect is on Facebook’s side.

Can this be monetized? Clearly. Whether it be collecting better data for targeting ads on Facebook or selling subscriptions to services, the possibilities are endless. When you consider that the global SMS market brings in about $100-billion annually (according to Facebook), it’s pretty clear that there is money to be made here.

Considering the massive size of this industry, winning matters. And up until now Facebook was not winning. Not even close. By the company’s own admission, people use Facebook Messenger, its current instant-messaging application, more as a replacement for e-mail. In other words, people are not in the habit of using Facebook Messenger for real-time conversations. That’s where WhatsApp shines.

Facebook hasn’t just invested $19-billion to take over a popular instant messaging app. They’ve invested in the possibility of dominating mobile communication, using voice, video and text. The upside, should they execute well, is probably larger than most of us can imagine.

This is not a short-term bet, nor is it suitable for those with weak stomachs. Short-term thinking by CEOs and investors is, in my opinion, dangerous. I’d much rather see investors model the thinking of successful executives who have a proven track record of creating long-term value versus the short-term thinking of most professional investors who underperform the market.

If you own Facebook shares as a long-term investment as I do, both personally and in my Strategy Lab portfolio, I’d suggest you view this acquisition as a very reasonable risk for Facebook to take. I’m holding onto my shares.

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