What's Going On With WhatsApp?

All of a sudden, Facebook (NASDAQ:FB) has yet another controversy fire to put out.

Already the subject of an antitrust investigation, facing scrutiny for banning President Donald Trump, and answering for its role in the insurrection at the Capitol, the tech giant is now experiencing a backlash regarding WhatsApp, the messaging service it acquired in 2014 for $19 billion.

After WhatsApp users received a notification about a new privacy policy, they rushed to alternatives, encouraged by the likes of Elon Musk and Edward Snowden, with downloads spiking at rival messaging apps like Signal and Telegram. Signal, a secure messaging app popular with journalists, became the most downloaded free app on both Apple and Android devices with downloads spiking 8.8 million the week of Jan. 4, an increase of nearly 4,000% from the week before, according to data from Sensor Tower.

A little privacy, please

In a notice that popped up on WhatsApp screens last week, users were told that the app now reserves the right to share data, including phone numbers, IP addresses, and payments made through the app and the rest of the Facebook family of apps, which includes Instagram and Facebook Messenger. It also said that if users communicate with businesses on WhatsApp, Facebook can then use that data to target them with ads on Facebook.

If users did not agree to the terms, they would be locked out of their accounts on Feb. 8.

Global backlash ensued and Facebook is now doing damage control. In India, a key growth market for Facebook and WhatsApp's biggest market where it has approximately 400 million users, the company has been running ads that pledge "WhatsApp respects and protects your privacy."

A trust problem

Facebook's actual data-sharing changes aren't as nefarious as they might seem. The company will not share or see data from chats with friends and family; the new policy only applies to interactions with businesses.

However, what often happens in instances like this is that people are already skeptical of a company, and then an easily misunderstood piece of information goes viral and a backlash against the company follows. Uber faced similar blowback in 2017 when it was believed to be breaking a strike by New York City taxi drivers during the protest against the travel ban on majority-Muslim countries.

The backlash against WhatsApp is part and parcel of Facebook's larger brand image problem. Though it has a massive user base of nearly 3 billion across its family of apps, many of its users don't really trust it, and they believe the company is using its data unscrupulously or the company is an accessory to things likes hate speech and anti-democratic movements, in addition to being a monopolist.

What it means for Facebook investors

Facebook acquired WhatsApp seven years ago for a price that gave much of the financial media sticker shock at the time, and it has only barely monetized the messaging service since then. That makes it something of a white elephant for Facebook as it has invested in the platform but never generated much profit. While owning WhatsApp and operating Facebook Messenger consolidates Facebook's domination over messaging (outside of China), the company is still waiting for WhatsApp to deliver real dollar value to the business. By contrast, Facebook paid all of $1 billion for Instagram in 2012, and the photo-sharing app has become a major cash cow for the company, now estimated to be worth more than $100 billion.

The backlash against WhatsApp will only make monetizing it more difficult. It's unclear how the current uproar will play out, and shifting entire group chats to new platforms may be difficult. That friction likely means that some users crying foul over the new privacy policy won't ultimately make the switch. Additionally, downloading a new app isn't the same as deleting WhatsApp, and so far there have not been significant uninstalls in India.

Since WhatsApp isn't material to Facebook's business performance, the ordeal won't have an effect on Facebook's bottom line. But it's yet another public relations crisis for a company that could desperately use good news, especially from a brand image perspective.

Facebook stock may be safe from the threat, but investors should watch what happens here as it's representative of a greater distrust toward Facebook and around data sharing, and that user perception is one of the company's greatest risks.

This article originally appeared in the Motley Fool.

Jeremy Bowman owns shares of Facebook. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool has a disclosure policy.