They are walking away from $1.3 billion after pressure to
increase revenue
By Kirsten Grind and Deepa Seetharaman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (June 6, 2018).
How ugly was the breakup between Facebook Inc. and the two
founders of WhatsApp, its biggest acquisition? The creators of the
popular messaging service are walking away leaving about $1.3
billion on the table.
The expensive exit caps a long-simmering dispute about how to
wring more revenue out of WhatsApp, according to people familiar
with the matter. Facebook has remained committed to its ad-based
business model amid criticism, even as Facebook Chief Executive
Mark Zuckerberg has had to defend the company before American and
European lawmakers.
The WhatsApp duo of Jan Koum and Brian Acton had persistent
disagreements in recent years with Mr. Zuckerberg and Chief
Operating Officer Sheryl Sandberg, who grew impatient for a greater
return on the company's 2014 blockbuster $22 billion purchase of
the messaging app, according to the people.
Many of the disputes with Facebook involved how to manage data
privacy while also making money from WhatsApp's large user base,
including through the targeted ads that WhatsApp's founders had
long opposed. In the past couple of years especially, Mr.
Zuckerberg and Ms. Sandberg pushed the WhatsApp founders to be more
flexible on those issues and move faster on other plans to generate
revenue, the people say.
Once, after Mr. Koum said he "didn't have enough people" to
implement a project, Mr. Zuckerberg dismissed him with, "I have all
the people you need," according to one person familiar with the
conversation.
WhatsApp was an incongruous fit within Facebook from the
beginning. Messrs. Acton and Koum are true believers on privacy
issues and have shown disdain for the potential commercial
applications of the service.
Facebook, on the other hand, has built a sprawling, lucrative
advertising business that shows ads to users based on data gathered
about their activities. Mr. Zuckerberg and Ms. Sandberg have touted
how an advertising-supported product makes it free for consumers
and helps bridge the digital divide.
When Facebook bought WhatsApp, it never publicly addressed how
the divergent philosophies would coexist. But Mr. Zuckerberg told
stock analysts that he and Mr. Koum agreed that advertising wasn't
the right way to make money from messaging apps. Mr. Zuckerberg
also said he promised the co-founders the autonomy to build their
own products. The sale to Facebook made the app founders both
multibillionaires.
Over time, each side grew frustrated with the other, according
to people in both camps. Mr. Koum announced April 30 he would
leave, and Mr. Acton resigned last September.
The WhatsApp co-founders didn't confront Mr. Zuckerberg at their
departures about their disagreements over where to take the
business, but had concluded they were fighting a losing battle and
wanted to preserve their relationship with the Facebook executive,
people familiar with the matter said. One person familiar with the
relationships described the environment as "very
passive-aggressive."
Small cultural disagreements between the two staffs also popped
up, involving issues such as noise around the office and the size
of WhatsApp's desks and bathrooms, that took on greater
significance as the split between the parent company and its
acquisition persisted.
The discord broke into public view in a March tweet by Mr.
Acton. During the height of the Cambridge Analytica controversy, in
which the research firm was accused of misusing Facebook user data
to aid the Trump campaign, Mr. Acton posted that he planned to
delete his Facebook account.
Within Facebook, some executives were surprised to see Mr. Acton
publicly bash the company since he didn't seem to leave on bad
terms, according to people familiar with the matter. When Mr. Acton
later visited Facebook's headquarters, David Marcus, an executive
who ran Facebook's other chat app, Messenger, confronted his former
colleague. "That was low class," Mr. Marcus said, according to
people familiar with the matter. Mr. Acton shrugged it off. Mr.
Marcus declined to comment.
The posts also prompted an angry call from Ms. Sandberg to Mr.
Koum, who assured her that Mr. Acton didn't mean any harm,
according to a person familiar with the call.
When Mr. Acton departed Facebook, he forfeited about $900
million in potential stock awards, according to people familiar
with the matter. Mr. Koum is expected to officially depart in
mid-August, in which case he would leave behind more than two
million unvested shares worth about $400 million at Facebook's
current stock price. Both men would have received all their
remaining shares had they stayed until this November, when their
contracts end.
The amount the two executives are leaving in unvested shares
hasn't been reported, nor have the full extent of the details
around their disagreements with Facebook over the years.
"Jan has done an amazing job building WhatsApp. He has been a
tireless advocate for privacy and encryption," Mr. Zuckerberg said
in May at the company's developer conference about Mr. Koum's
departure. He added he was proud that Facebook helped WhatsApp
launch end-to-end encryption a couple of years after the
acquisition.
In many ways, Facebook and WhatsApp couldn't have been more
different. Facebook from its beginning in 2004 leveraged access to
user information to sell targeted advertising that would be
displayed as people browsed their news feeds. That business model
has been hugely successful, driving Facebook's market value past
half a trillion dollars, with advertising accounting for 97% of the
firm's revenue.
It is also the antithesis of what WhatsApp professed to stand
for. Mr. Koum, a San Jose State University dropout, grew up in
Soviet-era Ukraine, where the government could track communication,
and talked frequently about his commitment to privacy.
Mr. Koum, 42, and Mr. Acton, 46, became friends while working as
engineers at Yahoo Inc., one of the first big tech companies to
embrace digital advertising. The experience was jarring for both
men, who came to regard display ads as garish, ruining the user
experience and allowing advertisers to collect all kinds of data on
unsuspecting individuals.
WhatsApp, which launched in 2009, was designed to be simple and
secure. Messages were immediately deleted from its servers once
sent. It charged some users 99 cents annually after one free year
and carried no ads. In a 2012 blog post the co-founders wrote, "We
wanted to make something that wasn't just another ad clearinghouse"
and called ads "insults to your intelligence."
The men are also close personal friends, bonding over ultimate
Frisbee, despite political differences. Mr. Koum, unlike Mr. Acton,
has publicly expressed support for Donald Trump.
When Facebook bought WhatsApp in February 2014, the messaging
service was growing rapidly and had already amassed 450 million
monthly users, making it more popular than Twitter Inc., which had
240 million monthly users at the time and was valued at $30
billion. WhatsApp currently has 1.5 billion users.
The deal still ranks as the largest-ever purchase of a company
backed by venture capital, and it was almost 10 times costlier than
Facebook's next most expensive acquisition.
Mr. Zuckerberg assured Messrs. Koum and Acton at the time that
he wouldn't place advertising in the messaging service, according
to a person familiar with the matter. Messrs. Koum and Acton also
negotiated an unusual clause in their contracts that said if
Facebook insisted on making any "additional monetization
initiatives" such as advertising in the app, it could give the
executives "good reason" to leave and cause an acceleration of
stock awards that hadn't vested, according to a nonpublic portion
of the companies' merger agreement reviewed by The Wall Street
Journal. The provision only kicks in if a co-founder is still
employed by Facebook when the company launches advertising or
another moneymaking strategy.
Mr. Acton initiated the clause in his contract allowing for
early vesting of his shares. But Facebook's legal team threatened a
fight, so Mr. Acton, already worth more than $3 billion, left it
alone, according to people familiar with the matter.
Some analysts in the tech community said a clash was inevitable.
Nate Elliott, principal of Nineteen Insights, a research and
advisory firm focused on digital marketing and social media, said
the WhatsApp founders are "pretty naive" for believing that
Facebook wouldn't ultimately find some way to make money from the
deal, such as with advertising. "Facebook is a business, not a
charity," he said.
At the time of the sale, WhatsApp was profitable with fee
revenue, although it is unclear by how much. Facebook doesn't break
out financial information for WhatsApp.
Facebook's hands-off stance changed around 2016. WhatsApp topped
one billion monthly users, and it had eliminated its 99 cent fee.
Facebook told investors it would stop increasing the number of ads
in Facebook's news feed, resulting in slower advertising-revenue
growth. This put pressure on Facebook's other properties --
including WhatsApp -- to make money.
That August, WhatsApp announced it would start sharing phone
numbers and other user data with Facebook, straying from its
earlier promise to be built "around the goal of knowing as little
about you as possible."
With Mr. Zuckerberg and Ms. Sandberg pushing to integrate it
into the larger company, WhatsApp moved its offices in January 2017
from Mountain View, Calif., to Facebook's Menlo Park headquarters
about 20 minutes away. Facebook tried to make it welcoming,
decorating the Building 10 office in WhatsApp's green color
scheme.
WhatsApp's roughly 200 employees at the time remained mostly
segregated from the rest of Facebook. Some of the employees were
turned off by Facebook's campus, a bustling collection of
restaurants, ice cream shops and services built to mirror
Disneyland.
Some Facebook staffers considered the WhatsApp unit a mystery
and sometimes poked fun at it. After WhatsApp employees hung up
posters over the walls instructing hallway passersby to "please
keep noise to a minimum," some Facebook employees mocked them with
chants of "Welcome to WhatsApp -- Shut up!" according to people
familiar with the matter.
Some employees even took issue with WhatsApp's desks, which were
a holdover from the Mountain View location and larger than the
standard desks in the Facebook offices. WhatsApp also negotiated
for nicer bathrooms, with doors that reach the floor. WhatsApp
conference rooms were off-limits to other Facebook employees.
"These little ticky-tacky things add up in a company that prides
itself on egalitarianism," said one Facebook employee.
Mr. Koum chafed at the constraints of working at a big company,
sometimes quibbling with Mr. Zuckerberg and other executives over
small details such as the chairs Facebook wanted WhatsApp to
purchase, a person familiar with the matter said.
In response to the pressure from above to make money, Messrs.
Koum and Acton proposed several ideas to bring in more revenue.
One, known as "re-engagement messaging," would let advertisers
contact only users who had already been their customers. Last year,
WhatsApp said it would charge companies for some future features
that connect them with customers over the app.
None of the proposals were as lucrative as Facebook's ad-based
model. "Well, that doesn't scale," Ms. Sandberg told the WhatsApp
executives of their proposals, according to a person familiar with
the matter. Ms. Sandberg wanted the WhatsApp leadership to pursue
advertising alongside other revenue models, another person familiar
with her thinking said.
Ms. Sandberg, 48, and Mr. Zuckerberg, 34, frequently brought up
their purchase of the photo-streaming app Instagram as a way to
persuade Messrs. Koum and Acton to allow advertising into WhatsApp.
Facebook in 2012 purchased Instagram, and the app's founders
initially tried their own advertising platform rather than
Facebook's. When Instagram fell short of its revenue targets in its
first few quarters, Facebook leadership pushed the founders to
adopt its targeted advertising model, and the transition was
relatively seamless, according to current and former employees.
Today, analysts estimate that Instagram is a key driver of
Facebook's revenue, and its founders, Kevin Systrom and Mike
Krieger, remain with the company. The men didn't respond to
requests for comment.
"It worked for Instagram," Ms. Sandberg told the WhatsApp
executives on at least one occasion, according to one person
familiar with the matter.
Other high-profile acquisitions such as developer platform
Parse, ad tech platform LiveRail and virtual-reality company Oculus
VR have fallen short of expectations, people familiar with those
deals say.
The senior Facebook executives appeared to grow frustrated by
the WhatsApp duo's reasons to delay plans that would help monetize
the service. Mr. Zuckerberg wanted WhatsApp executives to add more
"special features" to the app, whereas Messrs. Koum and Acton liked
its original simplicity.
Mr. Zuckerberg and Ms. Sandberg also wanted Messrs. Koum and
Acton to loosen their stance on encryption to allow more "business
flexibility," according to one person familiar with the matter. One
idea was to create a special channel between companies and users on
WhatsApp to deal with issues such as customer-service requests,
people familiar with the matter said. That setup would let
companies appoint employees or bots to field inquiries from users
and potentially store those messages in a decrypted state later
on.
Last summer, Facebook executives discussed plans to start
placing ads in WhatsApp's "Status" feature, which allows users to
post photo- and video-montages that last 24 hours. Similar features
exist across Facebook's services, including on Instagram, but
WhatsApp's version is now the most popular with 450 million users
as of May.
Mr. Acton -- described by one former WhatsApp employee as the
"moral compass" of the team -- decided to leave as the discussions
to place ads in Status picked up. Mr. Koum, who also sat on
Facebook's board, tried to persuade him to stay longer.
Mr. Koum remained another eight months, before announcing in a
Facebook post that he is "taking some time off to do things I enjoy
outside of technology, such as collecting rare air-cooled Porsches,
working on my cars and playing ultimate Frisbee." Mr. Koum is worth
about $9 billion, according to Forbes.
The next day, Mr. Koum said goodbye to WhatsApp and Facebook
employees at an all-hands meeting in Menlo Park. An employee asked
him about WhatsApp's plans for advertising.
Mr. Koum responded by first alluding to his well-documented
antipathy for ads, according to people familiar with his remarks.
But Mr. Koum added that if ads were to happen, placing them in
Status would be the least intrusive way of doing so, according to
the people.
Some people who heard the remarks interpreted them as Mr. Koum
saying he had made peace with the idea of advertising in
WhatsApp.
In his absence, WhatsApp will be run by Chris Daniels, a
longtime Facebook executive who is tasked with finding a business
model that brings in revenue at a level to justify the app's
purchase price, without damaging the features that make it so
popular.
Among WhatsApp's competitors is Signal, an encrypted messaging
app run by a nonprofit called the Signal Foundation and dedicated
to secure communication, with strict privacy controls and without
advertising. Mr. Acton donated $50 million to fund the foundation
and serves as its executive chairman.
Corrections & Amplifications Facebook Messenger has 1.3
billion monthly users. An earlier version of a chart in this
article incorrectly said it had 2.13 billion users. (June 5,
2018)
Write to Kirsten Grind at kirsten.grind@wsj.com and Deepa
Seetharaman at Deepa.Seetharaman@wsj.com
(END) Dow Jones Newswires
June 06, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
Meta Platforms (NASDAQ:META)
Historical Stock Chart
From Jun 2024 to Jul 2024
Meta Platforms (NASDAQ:META)
Historical Stock Chart
From Jul 2023 to Jul 2024