Making Sense of Facebook’s $19 Billion Acquisition of Whatsapp

I wrote this blog post on February 20, 2014. I didn't have a blog then, so I posted it on Facebook. Only "thought leaders" can blog on LinkedIn. 

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My initial reaction to Facebook’s $19 billion acquisition of Whatsapp was the same as everyone else’s: sticker shock. $19 billion is the kind of number that is hard to wrap your head around. How could this company that I’d never heard of before yesterday, with the kitschy name, be worth more than American Airlines, Progressive, or Mattel?

I wanted to dig into their numbers and do some analysis to try to make sense of the purchase price. Alas, being a private company, there are no public filings to dissect. It doesn’t really matter though; given the company’s current state there is no way to make the numbers work. Even assuming the lofty stated target of one billion users, hypothetically assuming all of those users are paying users, and preposterously assuming every penny of revenue trickles down to their bottom line, at 99 cents per user per year, a conventional free cash flow valuation wouldn’t begin to approach the purchase price.

Even worse, Whatsapp has no patents to protect whatever it is that makes it special and there is no shortage of competitors. That must mean that the purchase is about Whatsapp’s young skewing user base, right? 350 million users is nothing to take lightly, but many of them are already Facebook users and it’s unclear what value lies there. Facebook has made a fortune out of collecting data from its users and selling it, but Whatsapp doesn’t collect data. Whatsapp delivers text messages and then deletes the messages from its servers. The stringent privacy controls are largely why it is so popular. Furthermore, Facebook intends to let the company operate autonomously, much like they have with Instagram, so the intention isn’t to integrate it with Facebook messenger. So if Whatsapp doesn’t make enough money to justify the purchase price and Facebook can’t mine it for its data trove or synergize the user bases, what is going on here?

Facebook is always talking about how it wants to be the nexus of all social interaction, and this acquisition is a strategic play to expand in this space. While it’s strange to think about Facebook as a mature company, it is approaching maturity and market saturation.They have to grow the business somehow: add users or add services. The majority of the analysis on the deal that I’ve seen focuses on the users, but I think what justifies the valuation is the service. Whatsapp costs 99 cents per user per year for unlimited text and picture messages. What do you pay for your text messaging?

Compared to Whatsapp, the rate you pay for text messaging through your mobile carrier is truly outrageous. This is where the value of the deal comes from. It’s not a move to expand their social networking business; it’s a move to expand into the telecom business. The mobile carrier business model is outdated and overpriced. Its ubiquity is really the only reason it still prints money like the Franklin Mint. Imagine Whatsapp adding Voice over IP (think Vonage or Skype) functionality. Suppose Facebook charges $20 (or $100) per user per year. With the rollout of blazing fast citywide WiFi networks, people soon won’t need mobile carriers at all.

Whatsapp reportedly turned down $10 billion from Google. Good for them; they ultimately got nearly twice as much from Facebook. However, Google makes much more intuitive sense as a partner for Whatsapp. Think about talking with Google Whatsapp on your Google Nexus that’s running Google Android on a Google Fiber WiFi network. Talk about vertical integration!

It is a bold move, betting so heavily on the evolution of communication technology. But communication technology is sure to evolve and Facebook is positioning itself to be at the forefront of not just social networking but rather all networking. $19 billion is an (almost) inconceivable amount of money, but this record-breaking deal is, at the very least, a harbinger of things to come. I have no idea if the deal will wind up being good for Facebook, but I'm sure that it’s bad for AT&T, Sprint, and Verizon.

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As a postscript... today Whatsapp announced VoIP service. Nailed it! Proof positive that you should continue reading this blog. Also, upon further reflection, I have even less of an idea why Whatsapp is worth $19 billion. It's not that the vision isn't worth it. It's that I don't understand why Facebook didn't develop something in-house. If they had spent their acquisition money on a marketing budget, they could get their user base up to 350 million users at a fraction of the cost.

And Putting People On The Moon

The title of this blog is a line from the Drive-By Truckers song "Puttin' People On The Moon" off of their terrific album The Dirty South. It is appropriated here not only because I'm a fan, but also because it tangentially refers to a number of things that I think about often, and somethings that I will inevitably write about.

Musically, that track is far from my favorite on the record. However, the story it spins is one that has really stuck with me. It tells the tale of a down on his luck everyman in a town downriver from the NASA base near Huntsville, Alabama. The protagonist blames his economic malaise on the base. His wife dies of cancer, which is caused by the base's environmental fallout. He laments, "they can put a man on the moon, and I'm stuck down here just scraping by."

It's powerful stuff. The juxtaposition of everyday struggle and the awesome spectacle of sending rockets into space. It is also a fitting allegory for the state of our economy as a whole. It is mystifying to me that we live in a society that can turn mountains into oceans, but 50 million Americans still live in poverty.

But I digress... this post is just intended as an explanation of the blog title. As for the blog, I have no plans for it. I do not intend to update it regularly or write about anything in particular. I'm going to write about whatever I want, whenever I want and see if this whole blogging thing sticks. We shall see.