Facebook's ironic challenge: An ad-free business

The social media giant has built its fortune on targeted ads to its 1.2 billion users. But its new $19 billion acquisition, the messaging service WhatsApp, is fundamentally opposed to them.

By MSN Money Partner Feb 20, 2014 10:18AM

The Wall St. Journal on MSN MoneyFacebook and WhatsApp icons on an iPhone © Justin Sullivan/Getty ImagesBy Spencer E. Ante, The Wall Street Journal

Facebook (FB) has built a nearly $175 billion company in part by letting brands create targeted advertisements for the social network's 1.2 billion users.

Now with its $19 billion acquisition of the mobile-messaging app WhatsApp, Facebook appears to be taking on a new kind of challenge: a business that doesn't want to be based on ads.

WhatsApp's founders aren't just against ads -- they seem downright hostile to them.

"Advertising isn't just the disruption of aesthetics, the insults to your intelligence and the interruption of your train of thought," wrote WhatsApp co-founder and CEO Jan Koum in a blog post in 2012 explaining why it doesn't sell ads.

Products suffer too, Koum said. Instead of spending a lot of time collecting, mining and packaging data, WhatsApp engineers are freed to focus their time fixing bugs, adding new features and creating a better product, he said. "Remember, when advertising is involved you the user are the product," Koum wrote.

WhatsApp is free for the first year but costs 99 cents a year after that. Its revenues may be large, but they aren't known.

So far, Facebook and WhatApp are downplaying their divergent advertising philosophies.

In a press release, Facebook CEO Mark Zuckerberg said the deal would help "make the world more open and connected." The company also said the acquisition would "bring more connectivity and utility to the world by delivering core internet services efficiently and affordably."

Zuckerberg and Koum both made the requisite statements about how the acquired start-up would remain autonomous and operate independently. WhatsApp has 450 million active users and Zuckerberg said it is on track to reach to one billion users.

The point was hammered home in a blog post by Jim Goetz, a partner at Sequoia Capital, the Silicon Valley venture-capital firm that made a killing by investing in WhatsApp. In the post, Goetz published an image of a note that he said Koum keeps on his desk that reads "No Ads! No Games! No Gimmicks!"

He said the note serves as a daily reminder of WhatsApp's "commitment to stay focused on building a pure messaging experience."

WhatsApp's contrarian approach, Goetz said, explains the app's success and how the founders outran more than a dozen rivals' apps that were all supported by ads.

"Rather than target users with ads — an approach they had grown to dislike during their time at Yahoo — they chose the opposite tack and charged a dollar for a product that is based on knowing as little about you as possible," Goetz wrote.

He added that WhatsApp doesn't collect personal information like your name, gender, address or age. It registers a user based on their phone number. Once delivered, messages are deleted from the company's servers.

Goetz said Facebook has assured the WhatsApp co-founders that the service "will remain ad free and they will not have to compromise on their principles." On a conference call about the deal, Zuckerberg reiterated the message, saying "I don't personally think ads are the right way to monetize messaging systems."

That's an eyebrow-raising message for a company that plans to keep its own Messenger app, and has been hyper-focused on collecting and monetizing user data through advertising. (Facebook is in the early stages of introducing ads to Instagram, the photo-sharing app it bought for $1 billion.)

Ultimately, the WhatsApp deal could be a smart move by Zuckerberg to take out an aggressive rival and diversify away from ads in a world where users continue to express concern about privacy. Any about-face by Facebook on ads would risk alienating the WhatsApp user base.

For now, the two sides seem to be drawing a clear line in the sand on ads that won't be crossed. Facebook's rich valuation and initial success in monetizing its users' mobile behavior give it some breathing room to experiment with a different business model.

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