WhatsApp founder Brian Acton’s sworn testimony that he wouldn't abide a pivot toward revenue-generating ads, games and “gimmicks” on the world-beating messaging app he created didn’t hold much weight compared to the fact the company was losing about $138 million dollars annually in 2013, a US Federal Trade Commission expert said today.
WhatsApp founder Brian Acton’s sworn testimony that he wouldn't abide a pivot toward revenue-generating ads, games and “gimmicks” on the world-beating messaging app he created didn’t hold much weight compared to the fact the company was losing about $138 million dollars annually in 2013, a US Federal Trade Commission expert said today.WhatsApp and Instagram were “highly likely to be successful” absent their acquisitions by Meta Platforms, according to trial testimony today from Jihoon Rim, a venture capitalist and former chief executive of Kakao Corp. — one of the largest public tech companies in South Korea.
At one point during a lively stint on the stand that lasted roughly three hours, US District Judge James Boasberg interrupted Rim’s examination to ask him about trial testimony offered by Sequoia Capital partner Jim Goetz last week (see here).
The FTC seeks to break up Meta Platform’s alleged monopoly over personal social networking services (see here).
Boasberg asked Rim why Goetz, who was the point person managing Sequoia’s investment in WhatsApp as it courted Meta and other potential acquirers, testified that it was “laughable” to suggest his firm or another venture capture investor would have forced WhatsApp to start displaying ads on its service.
“We were invited guests,” Goetz said last week on the stand. “There’s just no chance they were ever going to embrace advertising.”
Authors of investment memos — like Goetz — would not present speculative information to their investment committees which make the final decisions on whether to move forward, Rim said.
Throughout the trial, which entered its second week today, Meta and the FTC repeatedly turned to a note affixed to Acton’s desk at WhatsApp’s Mountain View, California, headquarters.
The handwritten note read: “No Ads! No Games! No Gimmicks!” followed by Acton’s signature.
Boasberg questioned Rim at length about WhatsApp’s potential paths to profitability and whether the only two successful monetization trajectories for the messaging service were subscriptions or ads.
Rim said he was “confident” the company’s experiments with a subscription model would not have worked. WhatsApp was already charging users in other countries prior to Meta’s acquisition, and it was “not working very well.”
The app’s total revenue around 2013 was $10.2 million versus a net loss of about $138 million, according to an internal investment memo prepared by Sequoia that was introduced as evidence during the trial.
Goetz understood and communicated to his firm’s investment committee the limitations of the WhatsApp subscription model; the advertising, games-based and social-networking monetization paths of competing messaging platforms; and his conversations with the founders about finding a business model to make the numbers work, Rim said.
Despite Acton and fellow WhatsApp founder Jan Koum’s expressed distaste for building social networking or gaming into their app, any VC who pitched an investment committee with scenarios that were unlikely to happen would be “misleading” them, Rim testified.
During cross-examination that became heated at several points, Meta attorney Alex Parkinson pressed Rim about why he didn’t include any citations to Acton’s deposition testimony in his expert report for the FTC.
Another Meta attorney, Daniel Dorris, later elicited testimony today from former Google and WhatsApp executive Neeraj Arora that adding advertisements to WhatsApp “was not even a discussion point” among Acton and co-founder Jan Koum. “They were not going to do it,”Arora said.
Parkinson asked Rim whether his “speculation” about Acton changing his mind was more important than Acton testifying about what he would do under oath.
Rim said he understood Acton’s reluctance to add a social network to WhatsApp or pursue monetization strategies involving ads, but “all the other evidence was pointing in that direction.”
“If you don’t earn money, you have to fire all your people, you have to close your service, the stock grants and stock options become meaningless … that’s not a path you want to follow,” Rim said.
VCs see stubborn founders all the time, can’t “force” their apps to adopt certain features, and companies can delay monetization up to a certain level while pursuing growth, but “you cannot lose money forever,” Rim testified.
“VCs are not charities and start-ups are not nonprofits,” Rim said. Founders often change their minds over time, especially when losing a lot of money — “then you have to face reality,” he said.
— ‘An extremely viral product’ —
During the FTC’s examination of Arora, the agency showed a 2010 internal presentation pitching Google’s senior management for authorization to make an acquisition offer to WhatsApp.
The top “strategic rationale” for the acquisition, according to the document: “Obtain an extremely viral product that works across all smartphone platforms” and “potentially grow it into a mobile social network.”
By April 2013, Google, Twitter, Tencent, Microsoft, Yahoo, Facebook, Quattrone, and Morgan Stanley banker Michael Grimes had all reached out to WhatsApp expressing acquisition interest, Goetz wrote to Arora in an email.
By that time, Arora had left Google and taken over non-product related business functions at WhatsApp — which rejected prior acquisition offers from the search giant that approached $100 million — he testified.
Morgan Stanley ultimately served as the banker for WhatsApp’s deal with Meta, according to Arora.
In a January 2014 slide deck prepared by the investment bank for potential acquirers, Morgan Stanley noted that Google’s resources combined with WhatsApps’ user base and traction “could create the predominant social network on mobile (surpassing Facebook).”
WhatsApp was “flooded with investment offers” from top tech companies and venture capital firms, not just Meta, according to Rim. That “doesn’t really happen if you are likely to fail,” he said.
A key contention from the FTC in the case is that Meta’s acquisition of WhatsApp was part of a long-running, anticompetitive course of conduct that illegally fortified Facebook’s monopolistic grip on the market for personal social networking services.
The FTC today pulled up a February 2014 presentation to Meta’s board on the proposed WhatsApp acquisition – then code-named “Cobalt” internally.
The presentation aimed at a ball-park valuation of WhatsApp based on comparing the user pools, growth and monetization of other digital platform services including: Skype, WeChat, Twitter, LINE, KakaoTalk, Viber and WhatsApp.
According to a table looking at each platform's “average revenue per user” or ARPU, Facebook was bringing in $6.81 per user while growing at a rate of 28 percent annually on a monthly-average-user basis.
“If Cobalt were to monetize at LINE’s current ARPU of $2.17 off its current user base of 460 [million] MAUs, it would generate approximately $1 billion of revenue,” the Meta slide deck said.
WhatsApp’s current monetization strategy was yielding only $0.10 per user, the slide said.
As of 2020, Meta was still trying to make money with WhatsApp, Meta executive Amin Zoufonoun said during videotaped deposition testimony played today in court.
As Meta did with Instagram, the company believed that it could invest in talent and tech infrastructure to grow the product before taking “the last step,” Zoufonoun said: “come up with a business model to keep the lights on.”
“WhatsApp to this day still hasn’t gotten to that last stage, as we did with Instagram,” he said.
— Meta cross-examination —
Rim’s testimony got heated at several points during Parkinson’s cross-examination. That controversy was overlaid by an objection from Meta that Rim’s report not be entered into evidence.
Boasberg deferred on ruling about the extent to which Rim’s report would be entered into the record, allowing his presentation to proceed and the materials to be displayed to the public.
During cross, the New York University business school professor was asked about Korean-language blog entries from last year where he posted about his work on the case under the nickname “Jimmy Rim,” a series of tweets prior to being retained by the FTC as an expert, and his treatment of the data included in his report.
Citing verbiage from the agency’s own description of Rim’s deposition testimony topics, Boasberg overruled an objection from the FTC that Rim could not answer questions about competition for personal social networking and other antitrust-related topics.
At one point, Parkinson said he was prepared to present Rim with multiple certified translations of a November 2024 blog entry where the FTC expert wrote about the US Justice Department’s remedies proposal in monopolization litigation against Google that is proceeding in the same District of Columbia courthouse this week (see here).
“Admittedly, it can be difficult to imagine we are victims of Big Tech, who have made our lives so much easier," Rim wrote, according to one certified translation of his post.
Rim took issue with how his words were characterized in the translation, prompting Parkinson to respond that Meta had procured several other certified translations of the blog entry.
The former Kakao CEO justified writing his blog entries on the basis that people in South Korea are keenly interested in what is happening in the US regulatory landscape involving major tech firms.
Earlier this month, South Korean President Yoon Suk Yeol’s dramatic ouster from office triggered a snap election that could serve as an inflection point for how the nation regulates its digital economy (see here).
Rim became defensive today after Parkinson questioned the extent of his knowledge about different venture capital firms and the veracity of his review of their internal documents in the case.
“Please don’t push me,” Rim said during one exchange where Parkinson followed up with additional questioning before the FTC expert had first finished answering.
Forming an expert opinion does not require reliance on internal documents, Rim said.
At one point, Parkinson moved to strike one of Rim’s answers about the evidentiary basis for calling Acton and Kuom “brilliant” in his expert report and assign the time for that answer to the FTC’s “chess clock” — which Boasberg is utilizing to keep the parties on schedule.
“Denied,” the judge responded immediately.
Rim also discussed three primary metrics that VCs use to assess the future prospects of app-based start-ups: scale, growth, and engagement.
Scale refers to an app’s user base, growth is a calculation of how many daily and monthly active users are added in a given period, and engagement, or “stickiness” is calculated by simply dividing the daily active users by the monthly active users during a specific timeframe, Rim said.
In an internal slide deck presented to Meta’s board prior to the company’s acquisition of WhatsApp, the company charted the third-highest level of engagement, behind only Facebook and another company that was not publicly disclosed.
That company, as well as the others that trailed WhatsApp, was a group of well-known consumer technology companies, Rim acknowledged under questioning from FTC attorney Julia Tar.
Tar asked whether it was possible to be a brilliant product designer and not have a good business strategy. “It’s possible,” Rim responded.
— Instagram —
During additional video deposition played in court today, Sequoia partner Roelof Botha was asked whether he was excited about the prospect of Instagram.
“Wouldn’t you be?” he responded, before describing how Instagram co-founders Kevin Systrom and Mike Krieger caught “lighting in a bottle” with a product that was taking off like a rocket less than a year after being released.
Twenty-four million people “organically” found the product with virtually zero marketing outlays from the company, a rarity in an industry where users can effectively be bought with marketing dollars but don’t always stick around when products aren’t engaging, he said.
Sequoia would have invested more in Instagram, Botha testified, but there were “too many pigs at the trough.”
The FTC’s case-in-chief continues tomorrow with planned testimony from Systrom.
Please e-mail editors@mlex.com to contact the editorial staff regarding this story, or to submit the names of lawyers and advisers.