WhatsApp: A Good Deal for Facebook, Even if It Cost $19 Billion!
Published in La Tribune
(France) on 26 February 2014
by Dominique Piotet (link to original)
(France) on 26 February 2014
by Dominique Piotet (link to original)
Translated from
by Clare Durif.
Edited by Bora Mici.
The $19 billion buy-out of WhatsApp, the mobile messaging app, was the big news in Silicon Valley last week. It is Facebook’s biggest purchase, after buying Instagram for over $1 billion in April 2012.
It’s a head-spinning deal, but did it pay too much? Is Facebook being irrational? Quite simply, is it reasonable to buy up a company that does not have any income yet and whose business model seems somewhat flimsy — total refusal of advertising, free for the first year, then just $1 a year? And, above all, is it yet another warning sign of a new Internet bubble, which everybody around the world seems to fear ... except in Silicon Valley?
A New Bubble?
First, is this buy-out another sign of a bubble? Even if everywhere else it seems totally irrational to pay $19 billion for a company with practically no income, that does not seem to be the case at the moment in the San Francisco Bay Area, which appears to be racing toward acquisitions. But let’s not forget the year 2000. Time Warner bought AOL for $160 billion. Steve Case made the deal of the century, but Time Warner struggled to recover, and it triggered the Internet bubble.
But look, there are at least two major differences: Time Warner understood nothing about the Internet of that era, and the market did not exist. Today, sister companies are buying each other out, with a pretty clear vision of the complementary nature of possible deals. Buy-outs are much more strategic than they were back in 2000.
You Need To Follow the User Base
Finally, the user base is there, and it is continuing to increase exponentially. And as they like to say in the Valley, this app "scales!" This certainly wasn't yet the case in 2000.
As far as WhatsApp is concerned, we are talking about an app that already has 450 million users, 70 percent of whom use it daily — 300 million — and that attracts 1 million new users a day. The volume of exchanges on the app is already equivalent to the global volume of SMS exchanges. It is already equivalent in population size to the third largest country in the world! In terms of growth, nothing like this has ever been seen before in an app. At this stage, WhatsApp is heading toward 1 billion users. Itself in the billions category, Facebook cannot ignore this, and necessarily, a good part of its users are also WhatsApp users. Mark Zuckerberg learned a big lesson from the AOL years: You need to follow the users!
A Good Deal for Facebook?
And yet, isn't $19 billion a crazy amount? In fact, if we make projections about the trajectory of WhatsApp users, it's pretty cheap! Today — according to July 2013 figures — a Facebook user is worth around $98, if we stick to the company’s stock exchange value. A Twitter user is valued at around $110, and a LinkedIn user at about $93 — basically, in the region of $100 dollars. By paying around $42 per user, Facebook is in fact getting a good deal, especially if we consider the growth potential of WhatsApp.
Furthermore, at all costs, Facebook must strengthen its position in the mobile market. Its original weakness meant that its stock exchange flotation was only half-successful, and it took the company 18 months to make up its losses in one of those strategic and technological turnarounds that are rarely seen, except in Silicon Valley. Today, Facebook is present on the mobile market, but it must strengthen its position at all costs. The acquisition of WhatsApp is therefore definitely strategic.
Finally, Facebook is paying for a large part of this acquisition in shares. It has more than $11 billion in the bank, making it easy to pay the cash part of the deal — $4 billion. For the rest, with a stock exchange value of $175 billion — as of Feb. 20 — there shouldn't be any problems mounting the operation. In this sense, this deal doesn't put Facebook in any danger.
Only the Paranoid Survive
Above all, this deal is reassuring for Facebook’s founder, who is concerned about the growth of services that will potentially compete for his market. Andy Grove, the co-founder of Intel, is known for having said that in Silicon Valley, only the paranoid survive. "Zuck," as he is nicknamed here, has clearly shown that he is in this category of survivors at any cost. At the same time, he is currently taking on the stature of a big boss, and that’s something new. Over the years, we have seen him evolve, but now it’s done: He’s finally matured.
What remains to be seen is how Facebook will integrate WhatsApp. For the time being the two companies will remain separate, but in the long term this does not seem to be viable. Moreover, the risk involved in integrating it, and mostly in applying the Facebook advertising model, means killing the goose that lays the golden egg. As is usual in this kind of operation, it’s all down to the execution. Facebook has not mastered this yet. And, considering the price they paid, it had better work ...
It’s a head-spinning deal, but did it pay too much? Is Facebook being irrational? Quite simply, is it reasonable to buy up a company that does not have any income yet and whose business model seems somewhat flimsy — total refusal of advertising, free for the first year, then just $1 a year? And, above all, is it yet another warning sign of a new Internet bubble, which everybody around the world seems to fear ... except in Silicon Valley?
A New Bubble?
First, is this buy-out another sign of a bubble? Even if everywhere else it seems totally irrational to pay $19 billion for a company with practically no income, that does not seem to be the case at the moment in the San Francisco Bay Area, which appears to be racing toward acquisitions. But let’s not forget the year 2000. Time Warner bought AOL for $160 billion. Steve Case made the deal of the century, but Time Warner struggled to recover, and it triggered the Internet bubble.
But look, there are at least two major differences: Time Warner understood nothing about the Internet of that era, and the market did not exist. Today, sister companies are buying each other out, with a pretty clear vision of the complementary nature of possible deals. Buy-outs are much more strategic than they were back in 2000.
You Need To Follow the User Base
Finally, the user base is there, and it is continuing to increase exponentially. And as they like to say in the Valley, this app "scales!" This certainly wasn't yet the case in 2000.
As far as WhatsApp is concerned, we are talking about an app that already has 450 million users, 70 percent of whom use it daily — 300 million — and that attracts 1 million new users a day. The volume of exchanges on the app is already equivalent to the global volume of SMS exchanges. It is already equivalent in population size to the third largest country in the world! In terms of growth, nothing like this has ever been seen before in an app. At this stage, WhatsApp is heading toward 1 billion users. Itself in the billions category, Facebook cannot ignore this, and necessarily, a good part of its users are also WhatsApp users. Mark Zuckerberg learned a big lesson from the AOL years: You need to follow the users!
A Good Deal for Facebook?
And yet, isn't $19 billion a crazy amount? In fact, if we make projections about the trajectory of WhatsApp users, it's pretty cheap! Today — according to July 2013 figures — a Facebook user is worth around $98, if we stick to the company’s stock exchange value. A Twitter user is valued at around $110, and a LinkedIn user at about $93 — basically, in the region of $100 dollars. By paying around $42 per user, Facebook is in fact getting a good deal, especially if we consider the growth potential of WhatsApp.
Furthermore, at all costs, Facebook must strengthen its position in the mobile market. Its original weakness meant that its stock exchange flotation was only half-successful, and it took the company 18 months to make up its losses in one of those strategic and technological turnarounds that are rarely seen, except in Silicon Valley. Today, Facebook is present on the mobile market, but it must strengthen its position at all costs. The acquisition of WhatsApp is therefore definitely strategic.
Finally, Facebook is paying for a large part of this acquisition in shares. It has more than $11 billion in the bank, making it easy to pay the cash part of the deal — $4 billion. For the rest, with a stock exchange value of $175 billion — as of Feb. 20 — there shouldn't be any problems mounting the operation. In this sense, this deal doesn't put Facebook in any danger.
Only the Paranoid Survive
Above all, this deal is reassuring for Facebook’s founder, who is concerned about the growth of services that will potentially compete for his market. Andy Grove, the co-founder of Intel, is known for having said that in Silicon Valley, only the paranoid survive. "Zuck," as he is nicknamed here, has clearly shown that he is in this category of survivors at any cost. At the same time, he is currently taking on the stature of a big boss, and that’s something new. Over the years, we have seen him evolve, but now it’s done: He’s finally matured.
What remains to be seen is how Facebook will integrate WhatsApp. For the time being the two companies will remain separate, but in the long term this does not seem to be viable. Moreover, the risk involved in integrating it, and mostly in applying the Facebook advertising model, means killing the goose that lays the golden egg. As is usual in this kind of operation, it’s all down to the execution. Facebook has not mastered this yet. And, considering the price they paid, it had better work ...
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