Inequality, Productivity and WhatsApp

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

According to news reports today, Facebook has agreed to buy 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 young 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 value comes instead from two other things that require 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.

The second is its network effect: The more people use it, the more other people want and need to use it in order to be connected. To that extent, it’s like Facebook — driven by connectivity.

Whatsapp’s worldwide usage has more than doubled in the past nine months, to 450 million people — and it’s growing by around a million users every day. On December 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 fifty-five 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.

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. In fact, the combination of digital technologies with huge network effects is pushing the ratio of employees to customers to new lows (WhatsApp’s 55 employees are all its 450 million customers need).

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 — just as 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. But jobs and wages are not growing. Unless we figure out how to bring all of them back into line – or spread the gains more widely – our economy cannot generate enough demand to sustain itself, and our society cannot maintain enough cohesion to keep us together.

This piece is cross-posted from RobertReich.org with permission.

5 Responses to "Inequality, Productivity and WhatsApp"

  1. zzzie   February 25, 2014 at 3:57 am

    Very persuasive , but figuring out how to do what is suggested in the last paragraph seems to elude everybody. The changes are so fast that it is hard to create new jobs for all of those who became "redundant"

  2. pkdecville   February 25, 2014 at 6:59 am

    Tough to read about… Here we have Whatsapp, a model of luck, vision, skill, and ingenuity winning the gold prize; A company with a story that Mitt Romney would celebrate.

    Regarding inequality, it's a side show. Yes, occasionally, an event like this will surprise and awe us, but our grievance clearly isn't with its founders, investors, or Mark. After all, unless someone engaged in unnecessary tax or insider trading shenanigans, this is striking it rich the really clean All American Apple Pie way.

    So I say inequality is just a side show here. Nothing to see. But, here's another strike it rich story:

    Let's find out how much money Mitt Romney's actually worth. Is he really a secret billionaire? If so, how did he become one? We need a well researched biography of his millions (or billions). It would be a wonderful tour of the world of High Finance and, probably, a truly remarkable story of inequality.

  3. jbvick   February 25, 2014 at 10:42 am

    One approach might be to take a contrarian mentality to creating jobs. Capitalism is very effective left to its own devise so its not going to help.
    Taking the example of Whatsapp It seems like we should take the approach that we are GOING to create jobs. Then when someone becomes very successful lots of jobs will be created.

  4. OnaLeaMarie   February 25, 2014 at 12:04 pm

    If 25 of those 55 folks go out and start new businesses possibly some of the gains could be shared with the rest of us who are not reaching for mega-wealth; simply sustainable jobs that support local communities and offer goods and/or services that have an over all, wholesome value.

    The problem now is education; how and why do people decide to (re) invest in community?

  5. Michael_E_S   February 26, 2014 at 6:12 am

    It seems that, capital intensive, technology is driving the value of labour inputs down irrevocably. If that is so, it is worse than futile to drive the cost of labor up artificially. To ensure greater social equity it is necessary to make everyone an owner as well as a worker. Many countries have tried to make this happen with varying levels of success. One that seems to me to be more than ordinarily successful is Australia's compulsory superannuation scheme. It ensures that every worker must become an investor and therefore an owner. Income streams are thus diversified: labour providing the majority during the first part of a worker's career, the investments providing the majority in later life.