New economy at work in Facebook’s $19 billion deal

02/25/2014 6:40 PM

02/25/2014 6:40 PM

If you ever wonder what’s fueling America’s staggering inequality, ponder Facebook’s acquisition of the mobile messaging company WhatsApp.

Facebook is buying WhatsApp for $19 billion. That’s the highest price paid for a startup in history. It’s $3 billion more than Facebook raised when it was first listed, and more than twice what Microsoft paid for Skype.

(To be precise, $12 billion of the $19 billion will be in the form of shares in Facebook, $4 billion will be in cash, and $3 billion in restricted stock to WhatsApp staff, which will vest in four years.)

Given that gargantuan amount, you might think WhatsApp is a big company. You’d be wrong. It has 55 employees, including its two founders, Jan Koum and Brian Acton.

WhatsApp’s value doesn’t come from making anything. It doesn’t need a large organization to distribute its services or implement its strategy. It doesn’t require lots of people to assemble anything or sell anything or transport anything.

Its value comes instead from two other things that need only a handful of people. First is its technology — a simple but powerful app that allows users to send and receive text, image, audio and video messages through the Internet. Second is its network effect: As with Facebook, the more that people use it, the more other people want and need to use it in order to be connected.

WhatsApp’s worldwide usage has more than doubled in the past nine months, to 450 million people — and it’s growing by about a million users every day. On Dec. 31, 2013, it handled 54 billion messages (making its service more popular than Twitter, now valued at about $30 billion.)

How does it make money? The first year of usage is free. After that, customers pay a small fee. At the scale it’s already achieved, even a small fee generates big bucks. And if it gets into advertising, it could reach more eyeballs than any other medium in history. It already has a database that could be mined in ways that reveal huge amounts of information about a significant percentage of the world’s population.

The winners here are truly big winners. WhatsApp’s 55 employees are now enormously rich. Its two founders are now billionaires. And the partners of the venture capital firm that financed it have also reaped a fortune.

And the rest of us? We’re winners in the sense that we have an even more efficient way to connect with each other.

But we’re not getting more jobs, and our wages are stuck.

In the emerging economy, there’s no longer any correlation between the size of a customer base and the number of employees necessary to serve them.

Meanwhile, the ranks of postal workers, call-center operators, telephone installers, the people who lay and service miles of cable, and the millions of other communication workers are dwindling. In the new economy, retail workers are succumbing to Amazon, office clerks and secretaries to Microsoft, and librarians and encyclopedia editors to Google.

Productivity keeps growing, as do corporate profits. And as consumers we’re getting great deals. This is all good.

But jobs and wages are not growing. In fact, despite the U.S. being in a recovery, the share of working-age Americans now in jobs is smaller than it has been in 35 years. And corporate profits now comprise the largest percent of the total economy, and wages the smallest, on record.

What’s the answer? Not to become neo-Luddites and reject the mind-blowing new technologies that are transforming our lives.

Instead, we need to figure out how to bring productivity and profits back into line with jobs and wages — or to spread the gains more widely. Otherwise, our economy cannot generate enough demand to sustain itself, and our society cannot maintain enough cohesion to keep us together.

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