Facebook to buys messaging app WhatsApp for $19bn

Facebook paid a staggering amount for WhatsApp last month, will it prove to be worth it?

Last month Facebook surprised no one with another of its venture-backed digital acquisitions but what was a surprise to many was the amount the deal with messaging service WhatsApp was worth. Comprising a mix of cash and shares the purchase set Facebook back a total of $19 billion (almost £12 billion), making it Facebook’s largest yet. It’s thought the number relates to the user base and reach but will Facebook really claw that much back in revenue and therefore make it worthwhile?

There’s no doubt about the sheer numbers of users, if not the revenue. WhatsApp currently serves 450 million users each month and boasts a genuinely impressive global user base – for some areas they have a higher take up than Facebook itself does.

So what makes this relatively little known app so popular?

The appeal of WhatsApp is that it offers a (mostly) free service to rival SMS messaging as it uses the web to send messages instead of phone lines. The costs of text, if not provided in phone contracts, can rack up and so for $1 a year sign up users can get the same functionality as SMS without accruing further charges. There’s additional features which the web generation may also approve of over texts – there’s an option to create groups of up to 50 recipients which can include photo and subject title – much more interactive and visual. Photo messaging is also free, something that incurs significant cost with SMS, even for users with unlimited free texts.

Zuckerberg himself deemed the deal “incredibly valuable”, citing the extra 1 million users that sign up to the service each week. Senior analyst at research company eMarketer, Cathy Boyle believes the deal to be worth it due to what the significant user base will offer Facebook, pointing out its exponential growth and the fact that it’s actually looking to take business share from the telecoms industry rather than from social media.

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Two people who will surely not be complaining are co-founders Jan Koum and Brian Acton, not only have they received a huge amount of cash and shares (along with venture capitalist firm Sepoia who backed them) they are also retaining independence and autonomous control, with Koum also joining Facebook’s board of directors. The deal was a mixture of:

$4 billion in cash
$12 billion in Facebook shares
$3 billion in Facebook stock to be given to WhatsApp employees and founders at a later date

The co-founders also granted the sale provided Facebook retain their clean, simple and (importantly) advertising-free interface. Given Facebook’s reliance on and commitment to advertising revenues is this really something that Zuckerberg and co will be able to resist? According to him, apparently so. He’s agreed (for now) that advertising does not make sense for a messaging service.

How then will Facebook recoup this vast outlay? Arguably they can afford it and so it therefore doesn’t matter. Additionally, considering so much of the deal was in stocks and shares, the deal is effectively worth whatever Facebook is worth, therefore not resulting in more spend beyond the $4 billion in cash. And there is still the argument that it is its users and reach that is worthwhile, over and above revenue – all the WhatsApp users are an audience for further interaction with Facebook. Not to mention the access Facebook will have to a vast number of phone numbers, which could prove incredibly valuable to their own advertising clientele.

That said, even with the $1 charge, the messaging app would have to continue at its current growth rate for some time for it to begin to pay for itself. And whilst it’s tempting to discount revenue as the only parameter for value the fact is this is business and expenditure needs to be recouped in order for the books to stack up. There is the potential to succumb to an over-inflating a market when the likes of Google, Yahoo and Facebook are able to afford these acquisitions but the danger lies in the market not reflecting business’ true worth, the result of which could be bubble and burst.

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