Is Facebook Paying Too Much for WhatsApp? 0-22

Is Facebook Paying Too Much for WhatsApp?

With $19 billion, Facebook could have purchased Sony or Gap or four aircraft carriers.  Instead, it bought WhatsApp, a tiny startup that so far had accumulated barely $60 million in funding, mostly from Sequoia.  This is nuts, you might say; although the world of mobile messaging is upon us, that is an awful lot of money.

But think about what exactly Facebook is buying:

Young users.  WhatsApp acquired about 450 million monthly active users in 5 years, 70% of whom are active each day, which is about three times as many as Facebook had after 5 years and almost 10 times more than Twitter or Skype had.  To be sure, these numbers translate into minuscule revenues and most of the users are probably on Facebook anyway.  On the other hand, they are just the people Facebook is most worried about losing.

A new business model. Unlike Facebook and most other Internet giants of that generation, WhatsApp employs a subscription-based revenue model, charging its users $0.99 a year after the first year of use. Further, in a decidedly different approach from Facebook, there is a commitment to no advertising and presumably no commercial exploitation of user data. The acquisition could help Facebook understand how to successfully execute on a business model that could replace its own.

Enhancements to the existing business model. The daily messaging volume of WhatsApp approaches the SMS volume of the entire global telecom industry, and while Facebook has become the medium for big announcements of life events, daily connections are better captured by metadata from messaging apps. Undoubtedly this data could much enhance Facebook’s ability to pick out people’s most important relationships from among their acquaintances, which would presumably lead to better-targeted advertising.

Internationalization. Facebook Messenger is big in the USA but not in other countries.  In key markets like India and South America WhatsApp is MUCH more popular than Facebook Messenger.  And this is where, we think, the majority of the immediate real value is: the global turn to mobile is quite evident and Facebook wants to be a part of it as soon as it can.

If you list all these reasons for the deal, and throw in some competitive pressure from the likes of Google, the $19 billion number might not look so silly after all. Time will tell.  But regardless of how this deal turns out, the one unambiguous loser, in our opinion, is the telecom industry, which currently enjoys about $100 billion year in revenues from SMS services globally.

Moral of the story: If you don’t create an alternative yourself, others will disrupt your business model for you.

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Facebook likes WhatsApp 02-21

Facebook likes WhatsApp

$19-bn deal for text messaging firm includes $12 bn in stock and $4 bn in cash

The frenzy to acquire fast-growing technology start-ups reached new heights on Thursday as Facebook announced its largest acquisition ever, saying it would pay at least $16 billion for WhatsApp, a text messaging application with 450 million users around the world who pay little or no money for it.

The hefty price signals the lengths to which Facebook's co-founder & chief executive, Mark Zuckerberg, will go to protect his company's turf as the dominant social network on the web, and is sure to fuel the debate on whether consumer internet companies are overvalued.

Facebook, based in Menlo Park, California, will pay $4 billion in cash and $12 billion worth of shares for WhatsApp. But the ultimate cost of the deal could rise to $19 billion, with WhatsApp employees and founders receiving an additional $3 billion in restricted stock units, which would vest over the next four years.

By any measure, Facebook is paying a steep price for a service that is widely used internationally but is less known in the US. WhatsApp does not sell advertising and has very little revenue. It charges users a flat fee of $1 a year to use the service, and the first year is free.

The purchase price dwarfs the $1 billion Facebook paid for photo-sharing service Instagram. At the time of that deal in 2012, critics assailed Facebook for overpaying, and this megadeal is sure to attract similar scrutiny. And, the price is also much higher than the $3 billion Facebook unsuccessfully offered to acquire Snapchat, another messaging service, late last year.

But Zuckerberg is clearly willing to spend big to acquire hot messaging technologies, which typically attract younger people more than Facebook does.

"Facebook is constantly working to not lose anybody," said Nate Elliott, an analyst with Forrester Research. "Sometimes that's them innovating on their own, sometimes mimicking competitors, and sometimes buying competitors."

The acquisition also reflects a new strategy at Facebook: The company intends to acquire or build a family of applications instead of simply buttressing its core social network.

Now a 10-year-old social network with 1.2 billion users globally, Facebook has become so ubiquitous in many countries that it risks losing some of the attention of users.

In buying WhatsApp, which is growing faster than its rival Twitter and other social services, Facebook gains access to customers who prefer communicating one-on-one or with very small groups rather than sharing information more widely.

Facebook also has struggled to gain traction in the message space in recent years, a big motivation for its failed offer for Snapchat. While Facebook Messenger, the company's chat platform, is popular with users, recent attempts to create its own direct messaging service have failed.

Facebook is justifying the price of this deal by citing WhatsApp's startling growth, which has been even faster than Facebook's own in its early years. On a conference call with analysts, David Ebersman, Facebook's chief financial officer, compared WhatsApp to companies with the potential to grow to one billion users.

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