A couple of days have passed since the news of the monster acquisition of WhatsApp by Facebook broke. More people have written about it already than I can possibly link to so I won’t even try. My immediate reaction just based on financial metrics was that Facebook massively overpaid but I wasn’t sure about the strategic side. Having had some time to think about that I am now convinced that this deal makes no sense.

Why? Because phone number based messenger apps can bootstrap very rapidly off the graph that is contained in people’s address books. We are witnessing that now with the Telegram Messenger app which apparently signed up nearly 5 million users yesterday. The UIs of all of these apps are virtually identical and are also extremely similar to the basic SMS UI that everyone around the world knows and understands. The combination means there is virtually no enduser lock in at the messaging layer.

So instead of paying $19 Billion, Facebook should and could have created its own version and promoted it via its massive network. I am quite convinced that they would have been able to get to half a billion users for a fraction of the amount of money! They could have promoted their version via Facebook itself and then spend a “cool” billion or two on advertising this globally and/or incentivizing installs. Let me repeat the key point: the switching cost for users on a phone number based messaging services is at or near zero (this is  different for identity based services and even more so if they are a platform that third parties can integrate with such as WeChat and Kik – the latter is a USV portfolio company).

All the arguments being made about Facebook simply using its highly (over?) valued stock to buy a business don’t add up. If you buy something with sustainable revenue streams, then great and you should do that all day long (especially if your revenue / earnings multiple is higher than the target’s). But shelling out a lot of money for something that you will (likely) make free and on top of it paying close to or possibly above your own revenue multiple makes no sense. Neither does the argument that they were taking out a threat. How many times can you take out a threat at 10% of your market cap? And why would you pay that much to eliminate a threat, when you have a credible “build” alternative?

I think Mark Zuckerberg blinked and the board didn’t push back hard (or maybe doesn’t even have the power to push back if they wanted to). And in fairness, Mark’s prior acquisition of Instagram was brilliant: great price and an amazing follower network that is based on identities that are separate from phone numbers (and has an obvious native mobile advertising model).

The winners here are clear: the founders and employees of WhatsApp and the limited and general partners at Sequoia Capital. An additional winner is Google – apparently they tried to buy WhatsApp for $10B and possibly even match the Facebook offer. Who should be most upset? Shareholders and employees of Facebook. Followed by users of WhatsApp who are apparently voting with their feet (or thumbs, as it were) which is likely what is driving Telegram’s sign up rate.