Behind the Messy, Expensive Split Between Facebook and WhatsApp’s Founders
▻https://www.wsj.com/articles/behind-the-messy-expensive-split-between-facebook-and-whatsapps-founders-152820
After a long dispute over how to produce more revenue with ads and data, the messaging app’s creators are walking away leaving about $1.3 billion on the table
By Kirsten Grind and
Deepa Seetharaman
June 5, 2018 10:24 a.m. ET
How ugly was the breakup between Facebook Inc. FB 0.49% 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.
Facebook CEO Mark Zuckerberg testified about privacy issues and the use of user data before a Senate committee in April.
Facebook CEO Mark Zuckerberg testified about privacy issues and the use of user data before a Senate committee in April. Photo: Alex Brandon/Press Pool
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.
Big Bet
Facebook paid substantially more for WhatsApp than any other deal.
Facebook’s five largest deals*
WhatsApp (2014)
$21.94 billion
Oculus VR (2014)
$2.30 billion
Instagram (2012)
$736 million
Microsoft† (2012)
$550 million
Onavo (2013)
$120 million
*price at close of deal †approximately 615 AOL patents and patent applications
Source: Dealogic
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.
Staff at Facebook headquarters in Menlo Park, Calif. Small cultural disagreements between Facebook and WhatsApp staffs, involving issues such as noise, size of desks and bathrooms, created friction.
Staff at Facebook headquarters in Menlo Park, Calif. Small cultural disagreements between Facebook and WhatsApp staffs, involving issues such as noise, size of desks and bathrooms, created friction. Photo: Kim Kulish/Corbis/Getty Images
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.
A sign in WhatsApp’s offices at Facebook headquarters. Some Facebook employees mocked WhatsApp with chants of ‘Welcome to WhatsApp—Shut up!’
A sign in WhatsApp’s offices at Facebook headquarters. Some Facebook employees mocked WhatsApp with chants of ‘Welcome to WhatsApp—Shut up!’
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.”
Text MeWorld-wide monthly active users for popularmessaging apps, in billions.Source: the companiesNote: *Across four main markets; iMessage, Google Hangoutsand Signal don’t disclose number of users.
WhatsAppFacebookMessengerWeChatTelegramLine*00.511.52
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.
David Marcus, vice president of messaging products for Facebook, spoke during the company’s F8 Developers Conference in San Jose on May 1.
David Marcus, vice president of messaging products for Facebook, spoke during the company’s F8 Developers Conference in San Jose on May 1. Photo: David Paul Morris/Bloomberg News
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.
Attendees used Oculus Go VR headsets during Facebook’s F8 Developers Conference.
Attendees used Oculus Go VR headsets during Facebook’s F8 Developers Conference. Photo: Justin Sullivan/Getty Images
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
