Six Pixels of Separation - The Blog
February 19, 2014 7:35 PM

16 Billion Things To Think About

It keeps happening.

Something pops up on Twitter, or in your Facebook newsfeed or via email that has you shaking your head in disbelief. There is probably no topic (this week) that caused this kind of visceral reaction more than Facebook's acquisition of WhatsApp. Personally, I'm still trying to understand if this is a $16 billion or $19 billion deal (half-joking). There has been a ton of discourse about the transaction. There are many who think that this is one of the smartest moves for Facebook, and then there are those who think that Facebook has lost its way.

Putting the emotions aside, what is this all about?

Let's start off with the number. Let's call it $16 billion. Currently, WhatsApp has close to 500 million users (and is quickly on its way to one billion). Let's assume that this is accurate and not an inflated number. Do you think that it is hard to get people who love your product/service to spend between $20-$40, or be worth about $20 in terms of media dollars to a third-party? As absurd as the overall number is, it's not that difficult to get consumers to spend between $20 and $40 in some way, shape or form on the platform. With that, the data and information has a substantial monetary component as well. From this perspective, the deal isn't all that ludicrous (and, this is looking at it from the perspective that it is an ad-free environment). Yes, it is big dollars, but if there is usage and people who are benefitting from the service, they will be inclined to stick around and understand that the business may become more freemium, have advertising or that their information is somehow going to be used and tied-in somewhere else.

Now, on to what, exactly, makes WhatsApp so interesting to Facebook.

I'm going to be a simpleton and a market of one. I've been using WhatsApp since it first came out, because I switched from BlackBerry to iPhone and wanted a BBM-like function that wasn't relegated to one type of device/platform. That's what WhatsApp really is. It is BBM for everyone. It took BlackBerry too long to make their app cross-platform and too many people were already lauding the simplicity of WhatsApp (and other apps like it) or were too locked into the platform to switch back to BBM. Timing is everything. A unified messaging platform where millions of people are sharing everything from quick texts to images and videos and groups chats is a major part of our collective digital social experience.

Public and private social experiences.

That's something else. Facebook is the public online social network. And, if you're looking solely at the numbers, WhatsApp is the private online social network. In a world where Snapchat is still getting attention (and turned away a $3 billion offer from Facebook), Facebook (and everyone else) is beginning to realize that our digital social lives are not entirely lived out in public and that there is a deep and hungry desire for users to have spaces that are both public and private. Facebook has attempted to build some of this functionality into their offering, but acquiring a platform like WhatsApp gives them this private social networking in a box. Private and group messaging is an important part of people staying connected. This acquisition also extends the Facebook portfolio.

Perhaps Facebook isn't about innovation, but about acquisitions and building a portfolio of companies.

Can you name the smartest thing that Facebook has done since launching? This isn't a slight against the company, but they have been very strategic with a head-down focus on developing and pushing the online social network forward in a bid to keep users connected, sharing more and being as public as possible. To ensure the progress of the core Facebook platform, they have made moves (like the acquisition of Instagram and now WhatsApp) to extend to other services. This is something I discussed in much more detail on January 31st of this year when the company announced the launch of a stand-alone reader app called, Paper (you can read the full commentary right here: Facebook Is Looking Smarter Than Ever). The point is that Facebook will continue to improve what Facebook is, but build, own and buy many other companies to build a portfolio of apps, services and businesses that are all loosely connected to their ultimate mission of connecting the people of the world.

Why this all pisses you off.

It's just business. We're up in arms because we don't see the practical dollars behind it (as we have in more traditional businesses). The numbers are so large and so inflated that we struggle to understand how that money will ever be recouped. It would be impossible not to sit here and be astonished by everything. Temper those emotions. Traditional media companies became massive media conglomerates by buying businesses that were attracting similar customers. Telecommunications companies started buying television studios and then built websites or bought magazine companies or newspapers or radio stations or whatever. This is no different. The digital media companies - with the capacity and dollars - are going to buy as many other major players as possible. This is just what big companies do. It is no different than the game of Risk that we all used to play as kids. One group is trying to dominate, own and manage as many spaces as people are connected in. That was always the vision of Facebook and they are simply doing everything that they can to deliver on that promise.

Why should the Internet be any different from other media entities? Why wouldn't Facebook make these big moves?

By Mitch Joel

Comments Comments Feed
  • Posted by Augie Ray
    Mitch Joel

    I honestly feel like a lot of smart people that I respect are starting to take leave of their senses. Either I'm just turning into a grumpy old man, or the social/tech bubble Kool Aid is getting awfully addictive.

    You noted, "it's not that difficult to get consumers to spend between $20 and $40 in some way, shape or form on the platform." Actually, it is VERY hard to get consumers to spend that kind of money on a platform. Last year, Facebook made income (not revenue) of just $1.50 per user. Twitter lost money for each user it had. And Yahoo, which has been around for almost 20 years now, didn't earn income of more than a buck a user three out of the last four years.

    WhatsApp charges $1 per user per year (although a year ago it had 200 million users but only managed revenue of $20 million, so go figure.) And it serves no ads and clearly promised this to users. Without some rapid change in WhatsApp's business model (or math), I don't see the ease with which Facebook will recover the $42 per user they paid for WhatsApp.

    Assuming WhatsApp sticks to its present business model of $1 per year, and assuming it has a gross margin of 25% (which means 75 cents of every dollar of revenue goes to running servers and paying salaries), it will take Facebook 160 years to break even. If WhatsApp multiplies its fee structure, will users stay or flee, as they have so often before, to free or lower-cost alternatives? The question is the same if WhatsApp starts serving ads. So again, I'm left to puzzle at the ease at which some believe $40/user will materialize.

    If I sound "pissed off" (to borrow your term), it is not because I cannot grasp big numbers but because I can. We've seen this before--companies "buying users" who then leak away to the next platform (Bebo? Dodgeball? And now Tumblr's looking suspiciously the same), the claim it all works out in the end because they're media companies (AOL-TimeWarner? NewsCorp/MySpace?), and the suggestion that new economics are more important than traditional ones ( Flooz? Webvan?)

    I feel like we have been in this same place before, and rather than learn from it, we're happy to buy into the euphoria. I appreciate the thoughts and agree that strategically the idea of this acquisition makes sense at SOME price, but I also don't think it's unfair or old-fashioned to look at the cost, study WhatsApp's business model, and question where Facebook intends to find that kind of value.

    • I don't think that the WhatsApp revenue you define is going to come from media dollars, as we have known them to date. I feel like the play towards that $40 is going to come through some kind of affiliate or business partnership deal. I believe that what you're saying is 100% accurate in reference to what we've seen as monetization strategies through advertising. I'm hopeful that won't be the play here. If WhatsApp can become the underlying way to conduct transactions - on both Facebook and WhatsApp... and Instagram... (people to people) there is something big here.

      Still, for my dollar, I believe this was a defensive move for Facebook to acquire more users, build a portfolio holdco for other engines of connectivity and, ultimately, to own as much digital communications by people as they possibly can.

      I still can't believe how much they are willing to pay for it.

      • Posted by Augie Ray
        Mitch Joel

        Thanks for the patient reply to my grumpy comment. I still don't see the logic in this acquisition and this price--if it were really that easy just to create $40 of value of per user, MySpace would be alive and kicking and Twitter would be wildly profitable.

        Far too many articles and blog posts (although not yours) have evaluated this acquisition as a strategy without consideration of cost, as if any strategy works for any price. Given the lack of ads, the business model, the privacy concerns, the way consumers flow from one app/service to another, etc., I still don't see this making sense.

        I'm happy to proven wrong, but I'd really like to see some more sensible, practical and financial evaluations of this acquisition and much less if-Facebook-thinks-it-makes-sense-then-it-must-make-sense sorts of analysis.

        I'm concerned this is another sign of a bubble and pending crash. I'm glad I'm not an investor now, but we sometimes forget bubble bursts don't just sting VCs and stockholders. When the dot-com bubble crashed, it took down the entire market and cost thousands of people jobs. I just don't think now is a time for euphoria but for some sanity.


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