Facebook's WhatsApp Acquisition: New Risks Emerge

| About: Facebook (FB)


WhatsApp has about 465 million users, and retaining them is important for Facebook.

Post-acquisition, WhatsApp has been facing issues like privacy concerns, security risks, and outage.

The world of message apps is highly competitive. These risks could lead to decline in the number of WhatsApp users.

In my article on Facebook (NASDAQ:FB), "WhatsApp acquisition: Fundamentals, Rewards, Risks," I had mentioned competition from existing messaging apps as one of the risk factors for WhatsApp. There are some possible risks that have emerged post the acquisition announcement. These risks may cause users to either stop using WhatsApp or switch to other messaging apps.

1) Privacy concerns

In March 2014, the Electronic Privacy Information Center (or EPIC), and the Center for Digital Democracy (or CDD) requested the US Federal Trade Commission (or FTC) investigate whether Facebook can access data of WhatsApp users. Further, the agencies requested FTC to prevent the merger until the privacy concerns are resolved.

When asked about the privacy issue, WhatsApp CEO and co-founder Jan Koum replied:

Respect for your privacy is coded into our DNA, and we built WhatsApp around the goal of knowing as little about you as possible: You don't have to give us your name and we don't ask for your email address. We don't know your birthday. We don't know your home address. We don't know where you work. We don't know your likes, what you search for on the internet or collect your GPS location. None of that data has ever been collected and stored by WhatsApp, and we really have no plans to change that.

If Facebook collects personal data of WhatsApp users, then the company could invite trouble from regulatory agencies. Jan Koum's statement has bought relief to WhatsApp users about their privacy concerns. However, there could be a decline in the number of active users, fearing that Facebook may change "Terms of Service" of WhatsApp in the future.

2) Security risk

In March 2014, Bas Bosschert, a security consultant, found a security flaw associated with WhatsApp chat logs saved on the SD card of an Android phone. The flexible access to phone hardware allows Android apps to communicate, and helps a user share content between apps. The flaw allows any Android application to read and upload WhatsApp's database on a server, if the user allows access to the SD card.

Bas Bosschert commented the following about WhatsApp's database:

The WhatsApp database is a SQLite3 database which can be converted to Excel for easier access. Lately WhatsApp is using encryption to encrypt the database, so it can no longer be opened by SQLite. But we can simply decrypt this database using a simple python script. This script converts the crypted database to a plain SQLite3 database. We can conclude that every application can read the WhatsApp database and it is also possible to read the chats from the encrypted databases.

This issue doesn't exist on iPhones or Windows Phone, as apps on these phones provide limited access to storage and other phone hardware. WhatsApp has put the blame on downloading of malicious apps on Android, and it released a new version of WhatsApp to fix this flaw. This a serious security flaw that puts user chats at risk.

3) Outage

In April 2014, WhatsApp users faced delays in sending and receiving messages after the message service handled 64 billion incoming and outgoing messages in a day. The service was facing this issue for about an hour before it got resolved. This is the second outage after Facebook's WhatsApp acquisition. The first outage that lasted for 210 minutes happened in February 2014 due to server issues. The good part of the second outage was that it broke WhatsApp's previous record of processing 54 billion messages a day on New Year's Eve in 2013.

LINE added 2 million users after WhatsApp's first outage in February 2014. Hence, WhatsApp should not ignore this problem, as users have options to switch to other messaging apps if they face outage problem repeatedly.


In April 2014, LINE has reached 400 million users, which is near to 465 million users of WhatsApp. Over the last 4 months, Line has added 1.7 million users per day. I would conclude by saying that in this competitive world of message apps, survival is the key. The risks associated with WhatsApp can prevent Facebook from achieving its target of 1 billion WhatsApp users, as well as retaining 465 million WhatsApp users.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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