You could almost hear the collective intake of breath when Facebook confirmed on Wednesday that it is buying WhatsApp for a staggering $19 billion, and immediately the second-guessing began: How could Facebook possibly justify paying so much? Was it a sign of desperation, or a smart move to acquire a potential competitor? Whatever the pros and cons of that massive number, I think the acquisition makes one thing clear: Mark Zuckerberg is not going to let anyone else disrupt Facebook before he does so himself.
We’ve seen this same pattern executed already, albeit in ways that had much less eye-popping price tags attached to them. Buying Instagram, for example, was a very similar move to quickly acquire an app that threatened the social network’s dominance in photos — and for a price that at the time seemed extremely high, even if it now seems pedestrian. SnapChat was a similar bet, although Facebook’s $3-billion offer was ultimately rejected.
Even for Facebook, threats exist everywhere
As Sarah Lacy at Pando points out, WhatsApp’s potential threat to Facebook is largely about photos, although it is also about messaging in general. And as he did with Instagram, Zuckerberg was more than willing to pull out as many zeros as it took to get that deal done, even if the number seemed astronomical at the time (there are reports that Google offered as much as $10 billion for WhatsApp before Facebook signed the deal).
What the acquisition means in practice is that Zuckerberg doesn’t really care how much Facebook has invested in building and modifying and launching and marketing its own messenger app, a number that is likely fairly substantial — he is more than prepared to kill his own child, as it were, if it means sustaining his market share and/or growing it in markets where Facebook is not as dominant, which is part of what the acquisition of WhatsApp offers.
From one perspective, Facebook’s repeated multibillion-dollar acquisitions or offers might look a lot like the desperation of a drowning man, grabbing at whatever flotsam or jetsam happens to float by in the hope that it will buy him a few more minutes. But it is a lot more than that.
Intel’s legendary CEO Andy Grove liked to say that “only the paranoid survive.” He talked about literally lying awake at night wondering how his competitors were going to kill him and his products — or, worse yet, how some company he had never even heard of was going to suddenly emerge with a disruptive technology that would make Intel irrelevant.
How to beat the innovator’s dilemma
Grove’s fear is the essence of Clay Christensen’s Innovator’s Dilemma. In his book of the same name, the Harvard economist described how, in case after case, smart and even innovative companies have repeatedly failed to do what is necessary to adapt to disruptive innovation — even when they see that disruption coming — because they are too attached to their existing business.
What some visionary leaders like Steve Jobs have realized is that the only way around this dilemma is to constantly disrupt your own products and markets yourself, before others can do so. If necessary, that means launching things that will actually kill an existing product or at least seriously impair its margins, which is exactly what Steve Jobs and Apple did with the iPod, the iPhone and the iPad.
One difference between Apple and Facebook is that Apple developed its own disruptive products, while Facebook seems to prefer buying them. Does that mean Facebook has lost its ability to innovate, as my colleague David Mayer has suggested? Perhaps. But at least it is willing to admit that what it has developed isn’t going to do the job, and it’s prepared to acquire something that will. Many companies consistently fail to do either of those things.
Strike while the iron is hot
What allows Facebook to do this, as a number of observers have pointed out, is that its share price provides it with the currency for doing massive deals like the WhatsApp acquisition. When your market cap is $170 billion and your stock is trading at 22 times revenues, it gives you a very powerful tool for acquiring whatever you need to acquire — and Zuckerberg’s control over the company via multiple voting shares makes it easy for him to make big bets quickly.
As Om has pointed out, Cisco made a number of similar bets on new technologies in the 1990s by using its stock as collateral — in deals that seemed equally insane in terms of the price it paid — and that strategy arguably helped save the networking giant from almost certain doom.
It’s also worth noting that while Facebook has acquired companies rather than doing more of its own innovating, it is also willing to make some big potential bets on the latter approach as well: Paper is a good example of a standalone app that, if it succeeds, could actually suck some of the attention away from Facebook itself or even become a replacement (as some have suggested WhatsApp and Instagram together could). That’s a gutsy move.
The bottom line is that many companies with market caps of $170 billion and over a billion users are happy to sit back and count the ways in which they have already succeeded. Mark Zuckerberg seems prepared to throw at least some or all of that out the window if it means dominating a potentially new market, or growing an existing one in new ways — and that is something worth admiring.
Post and thumbnail images courtesy of Shutterstock / Luke Schmidt