How on earth can Facebook justify WhatsApp price?
By Peter Thal Larsen and Rob Cox
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
For mere mortals who havenât partaken in whatever Kool-Aid Mark Zuckerberg is serving at FacebookâsÂ Hacker Way headquarters, is there any way to justify the $19 billion it is paying for WhatsApp?
It takes extraordinary suspension of disbelief â and a newÂ Breakingviews calculatorÂ â to see how the social network can bring the messaging startupâs 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 doesnât say what proportion of its customers pay. Whatâs 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, WhatsAppâs valuation boils down to how many customers will pay and how much theyâll 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 â well above todayâs $1 a year charge â it would yield net income of $675 million in 2016. Thatâs equivalent to 28 times Facebookâs purchase price, the same multiple the market puts on the social networkâs 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 Zuckerbergâs punchbowl.