Behind the Messy, Expensive Split Between Facebook and WhatsApp’s Founders

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​

How ugly was the breakup between Facebook Inc. FB -0.18% 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.

.. Messrs. Acton and Koum are true believers on privacy issues and have shown disdain for the potential commercial applications of the service.

.. 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.

..  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.

..  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.

.. David Marcus, an executive who ran Facebook’s other chat app, Messenger, confronted his former colleague. “That was low class,” Mr. Marcus said

.. When Mr. Acton departed Facebook, he forfeited about $900 million in potential stock awards

.. 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.

.. 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

.. 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.

.. 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

.. 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

.. 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,”

.. At the time of the sale, WhatsApp was profitable with fee revenue, although it is unclear by how much.

.. 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.”

.. 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.

.. 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!”

.. “These little ticky-tacky things add up in a company that prides itself on egalitarianism,” said one Facebook employee.

.. 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.

.. 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

..  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.

.. “It worked for Instagram,” Ms. Sandberg told the WhatsApp executives on at least one occasion

..  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,”

.. 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.

 

Benedict Evans: The death of the newsfeed

One basic problem here is that if the feed is focused on ‘what do I want to see?’, then it cannot be focused on ‘what do my friends want (or need) me to see?’ Sometimes this is the same thing – my friend and I both want me to see that they’re throwing a party tonight. But if every feed is a sample, then a user has no way to know who will see their post. Indeed, conceptually one might suggest that they have no way to know if anyone will see this post.

Of course, Facebook’s engagement teams won’t let that happen – if I feel too much that I’m shouting into the wilderness I’ll leave (this is one of Twitter’s new user problems), and so I’ll be rationed out at least enough exposure to friends and engagement feedback to keep posting. Until you don’t. But if something was really important, why would you put it on Facebook?

I think one could suggest that this is some of what’s behind the suggestions of systemically lower engagement on Facebook newsfeeds, and behind the obvious growth of person-to person chat (most obviously WhatsApp, iMessage, FB Messenger and Instagram – three of which Facebook of course owns). The social dynamics of a 1:1 chat work much more strongly against overload, and even if one person does overshare they’re in a separate box, that you can mute if you like.

..  a key Snap thesis – that though you still share things asymmetrically, there shouldn’t be an algorithm between you and your friends.

.. That is, maybe Stories mean you share more things, but by bundling them into one thing you place less load on your friends and reduce the need for a filter.

.. A Snapchat story isn’t a permanent record and has less pressure to show off your perfection. Stickers and filters are more fun and spontaneous than Facebook’s rigid blue boxes

.. The catch is that though these systems look like they reduce sharing overload, you really want group chats. And lots of groups. And when you have 10 WhatsApp groups with 50 people in each, then people will share to them pretty freely.

 

.. All social apps grow until you need a newsfeed
All newsfeeds grow until you need an algorithmic feed
All algorithmic feeds grow until you get fed up of not seeing stuff/seeing the wrong stuff & leave for new apps with less overload
All those new apps grow until…

.. perhaps the old joke ‘No-one goes there anymore – it’s too crowded.’ That is, for social, Metcalfe’s Law might look more like a bell curve. I don’t know what the next product here will be (I didn’t create Snap, after all). But tech like this tends to move in cycles – we swing from one kind of expression to another and back again, and we might be swinging away from the feed.

..  the ‘WhatsApp forward’ can take such a link and send it viral across a country, and where Facebook can ultimately kill a link or an entire source across the whole site if it really wants to, it’s very different for a P2P messaging app to make that call (outside China, of course).

.. the plea from many media companies to ‘up-rank’ their posts in the newsfeed – to make people eat their greens – and to kill ‘fake news’ links is at least theoretically possible on Facebook. It’s not possible in iMessage – with end-to-end encryption, Apple has no idea what you’re sharing.

WhatsApp Blog: Why we don’t sell ads

At every company that sells ads, a significant portion of their engineering team spends their day tuning data mining, writing better code to collect all your personal data, upgrading the servers that hold all the data and making sure it’s all being logged and collated and sliced and packaged and shipped out..

.. At WhatsApp, our engineers spend all their time fixing bugs, adding new features and ironing out all the little intricacies in our task of bringing rich, affordable, reliable messaging to every phone in the world. That’s our product and that’s our passion. Your data isn’t even in the picture. We are simply not interested in any of it.