How Much Risk Is Facebook Taking in $19B WhatsApp Deal?

NEWS ANALYSIS: Facebook is paying $42 for each of the 430 million users (mostly teens and pre-teens) who currently use WhatsApp. Is that too much?

With the Feb. 19 announcement that Facebook is planning to spend about 10 percent of its total market value -- or about $19 billion in cash and stocks for WhatsApp -- to buy the attention of a lot of young pre-teens and teens, the world's social network is not only getting younger and cooler, it is also taking a major financial risk.

Let's face it: WhatsApp is a merely an app, and mostly a free one at that. Granted, it is a very popular app. Is spending $19 billion -- the highest amount for an IT company ever -- simply lunacy, or is it brilliant business? More people think it's the former over the latter at this point, but let's draw a deep breath and take a closer look at the numbers.

Fact: Since Facebook's current market cap is $173.5 billion, the company is committing in the neighborhood of 10 percent of that value to the acquisition.

Fact: WhatsApp is a non-profitable 5-year-old startup which claims 430 million users, as of last month.

Cross-Platform Messaging App That Works

Fact: WhatsApp Messenger is a cross-platform mobile messaging app that allows users to exchange messages without having to pay separately for SMS. The freemium WhatsApp Messenger is available for iPhone (free for first year, $1 annually thereafter), Android, BlackBerry and Nokia phones. In addition to basic messaging, iPhone, Android and BlackBerry WhatsApp Messenger users can send each other unlimited images, video and audio media messages. Facebook's onsite messaging app has never been one of its most utilized features.

Fact: As of January 2014, the service claims about 200 million active monthly users, 10 billion messages sent and 17 billion received in a single day. In 2013, its users sent 18 billion messages and received 36 billion in return, three times the previous year’s metrics.

Fact: Facebook is taking a 10 percent loss to make sure they have a significant footprint in Europe, which is where much of WhatsApp's strength currently is located.

Fact: Facebook is paying about $42, more or less, for each of the 430 million users (mostly teens and pre-teens, and then again mostly in Europe) that WhatsApp has attracted to its service.

Forty-two Dollars Per Head Can Go a Long Way

Forty-two dollars for the eyes and loyalties of each of those millions of active users is certainly not cheap at the outset, but if you think long-term, what might be the ultimate revenue Facebook might get per user? It could be well into the hundreds or even thousands of dollars per year, when one considers all the potential value of providing all those messaging, video and image-sharing engagements for advertisers and marketers.

"The reality is, if you are the trusted brand in front of the user, you can take a margin off all their commerce, all their communication, all their dating -- all their everything," former Google executive Gil Elbaz, whose data-centric startup, Factual, is getting traction in the market, told eWEEK.

"I'd argue that there's hundreds to thousands of dollar per user per year that companies like Facebook, Google and Apple are believing are available. At some point in the future, when everything is done through technology, the ultimate consumer winner is going to be capturing a lot of value that's much larger than $42."

Trip Chowdhry, principal at Global Equities Research, wrote in a media advisory Feb. 20 that WhatsApp is "a very smart and an essential acquisition for Facebook; (it) sets up BlackBerry with BlackBerry Messenger as a close second for potential acquisition.

"Most of the developing world still is on feature phones, as the majority cannot afford a smart phone. WhatsApp is the only application that runs equally well on feature phones and on smart phones," Chowdhry wrote.

Acquisition 'Should Come as No Surprise'

Facebook's acquisition of WhatsApp should come as no surprise and makes sense for both parties, although there are some key challenges ahead in terms of how Facebook develops and monetizes WhatsApp going forward, said Eden Zoller, Principal Analyst of Consumer Telecoms at the Ovum consultancy.

The social messaging market is growing rapidly, with messaging volumes to reach 69 trillion with subscribers growing to 1.8 billion by the end of 2014, according to Ovum forecasts.

"An immediate benefit to Facebook in the WhatsApp acquisition is that it has enabled two strong social messaging players to be on the same team," Zoller said. "WhatsApp is a player that is strong in both mature markets as well as emerging markets across Asia and the Middle East, which present a significant growth opportunity for Facebook.

"At the same time, Facebook is growing its mobile footprint with close to a billion monthly active mobile users. This makes innovation in mobile services and capabilities an imperative, either organically or by acquiring best in class applications like WhatsApp."

Don't Forget the Phone Number Factor

Zoller pointed out something that most other analysts hadn't: the phone number factor.

"With the acquisition Facebook has gained access to WhatsApp's large repository of phone numbers, which was a missing link for Facebook's user information," Zoller said. "The access to phone numbers now bridges the offline and online worlds of Facebook users.

"WhatsApp will also enhance Facebook's mobile strategy and make the service grow faster and be stickier with mobile first users. Facebook will, in turn, provide WhatsApp with the funds and resources it needs to develop the service and become an even stronger competitor in an increasingly over crowded messaging market."

eWEEK also got some perspective from a competitor in the messaging space: two-year-old Mountain View, Calif.-based startup Tango, which has 200 million registered users of its own and about 65 million monthly users. Tango offers mobile video calls over 3G, 4G, and WiFi.

When asked if the $19 billion price tag for WhatsApp was out of whack, co-founder and CTO Eric Setten told eWEEK that "I actually understand the valuation. When you think about it, Facebook just acquired a service that has twice as many active users as Twitter for about half the price.

"There are definitely other proof points. That's somewhat of a rational value."

Rationality is still a debatable point here. We suspect there will be a lot more conversation about this deal as time moves on.

Chris Preimesberger

Chris J. Preimesberger

Chris J. Preimesberger is Editor-in-Chief of eWEEK and responsible for all the publication's coverage. In his 13 years and more than 4,000 articles at eWEEK, he has distinguished himself in reporting...