WhatsApp's $19 Billion Acquisition: Business Model and Encryption

WhatsApp's acquisition for $19 billion raised questions about its profitability and strategic value, despite its $382 million revenue from business messaging.

### Facebook's $19B WhatsApp Gamble: The Unlikely Origin, End-to-End Encryption, and Business Strategy
* 💰 In 2014, Facebook acquired WhatsApp for **$19 billion**, despite WhatsApp's relatively low revenue of **$382 million in 2023**, mainly from its **business messaging platform**.
* 🌍 WhatsApp's success was mainly driven by international markets, where **SMS services were less reliable or affordable** compared to the US.
* 🔐 To address security concerns and government scrutiny, WhatsApp implemented **end-to-end encryption**, using the **X3 DH key exchange protocol** to secure messages.
* 🦉 Signal, a rival messaging app funded by WhatsApp co-founder Brian Acton, also uses the **same encryption protocol**.
* 📈 Facebook's original plan to monetize WhatsApp through ads was met with resistance from the founders, leading to **their eventual departure from the company**.
* 🕵 Facebook collects various data points from WhatsApp users, such as **phone numbers, contacts, usage logs, and device details**, which can be combined with its existing data for **targeted advertising**.
* 🏢 WhatsApp has evolved into a **critical communication tool for businesses worldwide**, from small shops to large enterprises, offering features like **WhatsApp Shops and Payments**.
* 🤖 While some criticize WhatsApp's "super app" approach of combining different functions into a single platform, it reflects the platform's **adaptation to how users are leveraging it**.

something's really fishy about WhatsApp. It's been 10 years since made-up Facebook announced that it was buying the company for $22 billion. He's spending 19 billion dollars to buy it. Why did you do it? And what does it mean? And you would think that the reason behind this is obvious: more data to their algorithm, figuring out what you're discussing with your friends and serving you ads about it. And then there's the strategic value and what we can do together. But to this day, made a swears that all texts in WhatsApp are end-to-end encrypted, that they don't use them for ads. So is that true? I'm going to get back to that, don't worry. According to Ma's public filings, WhatsApp made $382 million in 2023, mostly from their business messaging platform. So that's how WhatsApp makes money. End the video. No, wait, of course, that's pennies compared to the 19 billion dollars that Zck paid to acquire WhatsApp. Where's the ROI? ROI: return on investment. It would literally take 49 years to recover the investment.

at this rate, why would he buy this not very profitable platform instead of using that money? I don't know, to buy either of these countries or fill 11,000 stadiums with 19 billion Rubber Chickens, or making movers that people actually want to use. So, what was the real angle for buying WhatsApp? Let's go back to the infamous announcement because it did take everyone by surprise. This was and still is one of the largest tech acquisitions in history, just shy of a Slack or LinkedIn. But those companies had real business models at the time. WhatsApp had around 450 million active users. Only OG app users ever paid anything, their $1 yearly fee. But beyond that, most people have never paid a single dollar for WhatsApp. Now, part of the reason for all this fuzz on WhatsApp being overvalued is that much of WhatsApp's success, their original product market fit, was mainly outside of the US 'cause America didn't really need a WhatsApp. Blurry photos, weird likes, you know, if your group has different phones, just use WhatsApp. The Americans have had

decent unlimited SMS and MMS, with all other 300 million Americans, but that wasn't a thing for the rest of the world. I'm Costa Rican, and when you hail from a smaller country, you have friends abroad, you travel outside the country, so you would need something back then. You would need something like Skype to be able to be in touch with your friends, or in even larger countries like India, SMS kind of sucked back then, but this was solved in the states, so much so that the founder of WhatsApp didn't even build WhatsApp for texting. WhatsApp started in 2009, founded 5 years earlier by Jan k, a former Yahoo employee. Again, replacing SMS was not a problem that needed solving in the US, so Jan's idea was more of a status update platform. So you would post public updates to your friends, and you would only see your friends' updates when you open the app. So that thing wasn't doing great, by the way. It was not. It wasn't easy finding OG WhatsApp screenshots. This version only really

ran for a few months and only for a handful of people, and it didn't do so well. Jan had enlisted his Russian friend Alex Fishman, and they were working with a freelancer called Igor Solomnikov. Sorry if I butcher your name, man. Mid-2009, Apple started allowing push notifications with, wait for it, iOS 3. So now you could get status updates even when you weren't using WhatsApp, and a handful of early users started posting updates that felt more like texts, and the company could read them because they were designed as public updates. And so the WhatsApp team figured that they'd chase that use case, ride the wave, and then they released the WhatsApp Messenger in August 2009, and it blew up. It quickly grew to 250,000 users, and people were loving it. And this is when Brian Acton joined, who was another Yahoo employee, and he convinced a few friends to invest as well. And as part of this deal, he got co-founder status. Wait, so why does he get to call himself a

co-founder. If he came in later with money, kind of reminds me of another co-founder debacle we covered last week because WhatsApp was originally designed as a status update service. Encryption was not a concern at this point. Before 2011, WhatsApp just used a verification text to activate your phone number and text other people. So if New York me wants to send something to Costa Rica me, I'm basically writing a message on a piece of paper that travels the internet. The server gets to the destination as a public message. People on the internet can see it, the router can see it, and WhatsApp's server can definitely see it. So in this version of WhatsApp, any texts you exchange were readable by the owner of the company, by the servers, right? The servers could see the text, and they could have potentially used that to target ads. Also, in 2011, this company called WhatsApp Hack discovered an exploit that would allow them to intercept the verification SMS that you send to activate a device and potentially use that to hack into your account and read your text. So WhatsApp

figured they needed to do something about it, and that something was encryption. But to understand encryption, we need an explainer. Time. Their first attempt at encryption was to create an encrypted connection with the server so that the message would travel encrypted through the internet. And the problem with this was that many people figured out how to hijack accounts, hackers, or often security researchers, and more crucially to our story, the message in WhatsApp servers could have been visible 'cause the server had the key to see it, which means that the message in Facebook servers after the acquisition could also be visible. Senator, we run ads. I'm oversimplifying here, but bear with me. The point is that even before the acquisition, WhatsApp had gotten too popular too quickly, and governments had started to raise flags against using WhatsApp because of these security issues. So they had to do something about it, and so end-to-end encryption became the only solution. But before I talk about that, I should talk about Freshsales, the AI-powered CRM product from Freshworks and the sponsor for today's video. Fresh

sales is a super easy-to-use sales product that can get your team started from day one without any training. With built-in email, phone, chat, SMS, and of course, WhatsApp support, salespeople can connect with their prospects right from the CRM and engage with context of what has been said before. It lets you automate that boring repetitive task and set up automated sequences so prospects are engaged without any additional manual work. Sales teams can manage their deals across stages. They can send signed contracts and track quotas to ensure their numbers are always on the rise. And with the Fair Sales mobile app, they can stay connected even when they're on the go. What's more, Fair Sales is powered by Freddy AI, which is this AI-powered assistance that helps sales teams identify high-intent leads and craft personalized emails to boost conversions. Freddy also spotlights promising deals and recommends actions so you're always a step ahead. If you're a startup looking for a new CRM or simply to move away from your current setup, you should check them out. Their basic plans start at

just $9 okay so in ENT an encryption I have created a key. This is called a private key. It's a much longer number than this one, but the point is it's completely secret. Nobody should know what this is. And then create two public keys and send them over the Internet. Everyone will be able to see them 'cause they're live on the internet, but that's okay. The receiver gets these keys. He has his own private key and he uses it to create a mush combination of numbers that include both the public keys and his private key. So the receiver then sends all this gibberish back to the original sender who now puts his own key into it and sends a message back. So anybody who intercepted any of these messages can see this, but all they have is the public keys and they can't decrypt the message. The origin for this key exchange mechanism is called the Diffy Helman key exchange protocol, and this is old '70s old school '70s cryptography. WhatsApp uses a newer version of this called the X3 DH which

is the extended triple Diffy Helman mechanism, which is even more secure. But the point is that the only way, the only way to decode this, is to know one of the two private keys. So now, you can send these messages through any server, public or private, and the only device that can see the original message is your friend's device. And this is the standard for most messaging apps these days. One of the reasons why iMessage became so popular early on was because it was one of the first ones to do it, and that actually got them in trouble with the police because there are no back doors with end-to-end encryption. So if the FBI wants to see someone's texts, they can't. Apple can't. So now, unless the Zuck has some reptile AI supercomputer hidden in his data centers, I'm going to have to go with no. I am not a lizard. Current computing power would take 3 * 10 to the power 59 to decrypt your message, which is a lot more than the age of the universe, 13.8.

billion years. The end toin encryption that I've just described to you is the same one that Signal uses. Signal is, of course, WhatsApp's rival. It's a nonprofit organization, mostly funded by Brian Acton, one of the co-founders of WhatsApp, which makes this whole thing kind of poetic if you think about it. But that is really the last happy note in this video because Facebook has done everything it can to mine as much data as it can from WhatsApp, and it has kind of succeeded at that. Privacy-focused messaging platform has to be encrypted by all accounts. Things were pretty rushed when the acquisition was negotiated. Facebook was desperate to buy WhatsApp, in part because the founders had also visited Google in Mountain View around that time, and they were worried that Google might beat them to the acquisition. And that's in part what prompted the crazy number and some flexibility in the negotiations. If we can do a pretty good job of helping um WhatsApp to grow, that this is just going to be a huge business because as part of the sale, WhatsApp Founders

agreed to a few things with Mark. Some were kind of like verbal agreements, some on paper. There was an actual clause in the contract that said that they could collect all of their stock if Facebook started implementing monetization initiatives without their consent. But soon after they joined, Brian recalls overhearing Facebook's projections for WhatsApp Revenue: $10 billion per year by 2019. I mean you have to recover that ROI, and that $10 billion plan was, by all means, to put ads on WhatsApp starting with status updates. Businesses obviously need to make money, and even Brian understood this, but his proposal was a metered usage model for people who exceeded a certain number of messages in a month. You build it once, it runs everywhere, in every country. You don't need a sophisticated Salesforce. It's a very simple business, but Cheryl Sandberg threw away the idea. Her words were, It won't scale. I called her out one time. I was like, No, you don't mean that it won't scale, you mean it won't make as much.

money as and she kind of hemmed and hot a little after only a couple of years. Brian and Jan understood that they were not going to win this battle. As altruistic as their original vision for WhatsApp might have been, they had given that away when they took Facebook's check. And of course, let's be real, who wouldn't take the $19 million check? But these disagreements escalated to them eventually leaving the company. In case of Brian, before his stock had fully vested, which meant leaving being about $800 million behind. He's still a billionaire, so don't worry. He was like, Okay, well, you want to do these things I don't want to do. It's better if I get out of your way. And I did. Facebook's first broken promise was linking your WhatsApp profile to their servers and to your Facebook account. And it did that just 2 years after the buy, after actually promising that they wouldn't. It was an easy case for the EU Trade Commission that slapped them with a measly 110 million EUR fine. They've

made a bunch of privacy updates over their years. Yes, keeping is encrypted, but now with access to your phone number, your contacts, logs of how much and how often you use WhatsApp, information about how you interact with other users, device identifiers, and other device details like IP address, operating system, browser details, battery health information, app version, mobile network, language, and time zone. And this may feel harmless, but combine that with Facebook or maas already huge library of data, your Facebook profile, your Instagram profile, your friends profiles, your photos, the friends that you stalk, and most crucially your online activity. Most people don't know this, but the Facebook pixel is key to this. I as a website business, I am encouraged to put a Facebook pixel on my page so that when you visit, I can then serve you retargeting ads back on Facebook, but with that, Facebook now knows which websites you visited, and at least 177% of all websites in the world have a Facebook pixel installed. So even if an ad suddenly feels strangely related to what you were just texting about, chances

are the Zuck knows what you're talking about without even having to read that text. But that isn't WhatsApp's endgame. Americans don't generally know this one, but WhatsApp has become the operating system for business communication in many countries around the world. From talking to your bank, to ordering food, to booking appointments, to customer support and sales, entire economies in the developing world operate on WhatsApp. Genuinely and honestly, quite sadly, even governments. For large businesses, online shopping has moved well online. For large department store, the way to maximize sales beyond the physical location is to build an e-commerce platform, hire a shipping company, establish call center chat support, and all the stuff that you need with a decent e-commerce. But for a small Mom and Pop Shop, the way to talk to their customers is WhatsApp. They have no budget for websites or fancy chat support tools. They operate not only on what they know how to use, but also on where their customers are and where it's easier for them to get in touch. And in part because of the ease of use for

customers, larger and larger companies have now moved to WhatsApp from banks to car dealerships. As a business, you can even set up your own Facebook and Instagram ads from your WhatsApp profile, unlocking this batch of millions of advertisers who are probably not very experienced at maintaining paid advertising campaigns on the usual platforms. They're probably going to overspend. You also have WhatsApp shops and WhatsApp payments, which does require some information to leave the safe pathway of end-to-end encryption so that they can actually put a charge on your card. This is not the only exception to the rule because businesses can choose to store messages you send to them in Facebook servers. Remember, encryption protects your messages through their journey, but after that, it's really up to the recipient. So, you know, kids, if you're sending eggplant pictures, well, you know the risks. I absolutely hate this WhatsApp super app approach. By the way, I threw out two drafts of this strip that were mostly just rants against WhatsApp because I like my apps separate, one for

texting with friends and one for browsing store content. I think it's a lazy and terrible use. Your experience just put everything on the same place. That's just me, but I generally don't know if anyone foresaw this concept of WhatsApp becoming the operating system for small businesses. But you have to give it to them. They are adapting to what people are using the platform for. So to mark this is the next chapter in his company. So well, I guess so long for the metaverse. But enough with the fun in games. It's time for everyone's favorite work.

WhatsApp’s SECRET Business Model (It’s Not Reading your Texts)

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The $19 Billion Acquisition of WhatsApp: A Questionable Investment

Facebook's $19 billion acquisition of WhatsApp raised questions about its profitability, given that it only made $382 million in 2023.

The app's success was mainly outside the US, where it filled a need for affordable messaging services, unlike in the US where SMS was more common.

WhatsApp's original idea as a status update platform was not successful, and its revenue relied on a small number of users paying a $1 yearly fee, leading to skepticism about the acquisition's ROI.

WhatsApp started in 2009 as a small project with a few users posting public updates.

However, it quickly grew to 250,000 users and gained attention after the release of the WhatsApp Messenger in August 2009.

The app's early version raised concerns as all exchanged texts were readable by the company's servers, leading to potential privacy and security issues.

These concerns pushed WhatsApp to implement end-to-end encryption as the solution to address these issues and gain the trust of users and governments.

Fair Sales is a user-friendly CRM with built-in communication channels and automation for engaging prospects.

The CRM offers deal management, contract sending, and quota tracking for sales teams.

Additionally, it provides AI-powered assistance to identify high-intent leads and offers a mobile app for on-the-go access.

The origin of its encryption protocol, X3 DH, provides a high level of security, making it difficult to decrypt messages without private keys.

The Turbulent Relationship Between WhatsApp and Facebook

Signal, a nonprofit rival of WhatsApp, uses the same encryption technique.

Facebook's desperate acquisition of WhatsApp led to flexible and rushed negotiations.

After overhearing Facebook's plan to generate $10 billion in revenue from WhatsApp, co-founder Brian Acton's proposal for a metered usage model was rejected, leading to disagreements and eventually, the founders' departure from the company.

The Privacy Concerns of WhatsApp's Data Collection

WhatsApp has significantly increased its data collection over the years, including access to phone numbers, contacts, user interactions, and device details.

The app's connection to Facebook allows for extensive tracking of users' online activity, with a large number of websites using the Facebook pixel.

Additionally, WhatsApp has become a crucial tool for business communication, particularly in developing countries, and is widely used by small businesses to interact with customers due to its ease of use and accessibility.

The Growing Role of WhatsApp for Businesses

WhatsApp is now being used by a growing number of businesses for advertising, setting up shops, and processing payments, potentially leading to overspending by inexperienced advertisers.

The platform's shift towards becoming an operating system for small businesses raises concerns about data privacy and encryption.

Despite criticism, WhatsApp is adapting to the needs of its users and expanding its role in the business world.