How on earth can Facebook justify WhatsApp price?

February 20, 2014

By Peter Thal Larsen and Rob Cox
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

 

For mere mortals who haven’t partaken in whatever Kool-Aid Mark Zuckerberg is serving at Facebook’s Hacker Way headquarters, is there any way to justify the $19 billion it is paying for WhatsApp?

It takes extraordinary suspension of disbelief – and a new Breakingviews calculator – to see how the social network can bring the messaging startup’s valuation in line with its own.

Any fact-based analysis is handicapped by a paucity of hard numbers. WhatsApp says it has 450 million active users and is adding 1 million new users per day. The app is free for 12 months, after which it costs $1 a year. WhatsApp doesn’t say what proportion of its customers pay. What’s clear, however, is that it has, for the time being, no other sources of revenue: WhatsApp has foresworn advertising.

Say Zuckerberg is right and WhatsApp reaches 1 billion users by 2016. Costs are probably low: rival Viber, which has fewer users, spent around $30 million in 2013. Assume WhatsApp, which has about 50 employees, currently spends $50 million on overhead, servers and bandwidth this year. Maybe that rises to $75 million by 2016.

If the ban on advertising remains, WhatsApp’s valuation boils down to how many customers will pay and how much they’ll spend. At the moment, the proportion is probably low. If WhatsApp is to justify its price tag, it needs to increase both.

Over time, if it could convince a tenth of users to pay, it would equate to 100 million people. At $1 a month – well above today’s $1 a year charge – it would yield net income of $675 million in 2016. That’s equivalent to 28 times Facebook’s purchase price, the same multiple the market puts on the social network’s stock. Equally, if an improbable 800 million people pay $1.50 a year, the valuation could also stack up.

Charging a bit for messaging sounds plausible, especially if it undercuts existing mobile phone charges. But such apps are ubiquitous and the barriers to switching relatively low. The financial logic for buying WhatsApp can be modeled, but requires a big quaff from Zuckerberg’s punchbowl.

Comments

I have WhatsApp on my phone – I have no idea what it is or does. I use Viber sometimes, Skype others… I also have Facebook on my phone (both WhatsApp and Facebook I cannot seem to uninstall on my phone…) and never use it. Do they count people like me as users I wonder?

I don’t wish anyone ill, but I can’t fathom how Twitter, Facebook, WhatsApp and their ilk are worth tens or hundreds of billions of dollars! They have little to no sales and are annoying to most people; how they believe in their growth models is beyond me…

Posted by CDN_Rebel | Report as abusive
 

How long before the mobile operators enter the space , in software terms to duplicate whatApp would cost nothing , like wise they could block its use. Why allow an app that is eating away at your revenue stream. Facebook had to buy it because it was destroying their own user base .

Posted by frenchchef | Report as abusive
 

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