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 » Ghanian Contents Only » Ghana News Achieve » 

WhatsApp - is it worth it?

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1 WhatsApp - is it worth it? on Sat Aug 16, 2014 11:40 pm

swiftblack

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Why exactly is WhatsApp worth $19bn (£12bn) to Facebook?

After all, that is more than the current valuations of the UK retailer Next, the publishing giant Pearson, or the commercial television business ITV. Those businesses earn quite chunky profits, unlike the fast-growing messaging app.

I have been given all sorts of theories about why the deal makes sense. The Moshi Monster tycoon Michael Smith tweets this: "Messaging Apps are extremely valuable when games, commerce, news etc sits atop. Look at Line & WeChat."

A friend, roughly the same age as me, sends me this: "While we're on Twitter, twice as many people are on WhatsApp, which you and I will almost certainly never use because we're old."

So there we have it. A vast youthful and international audience that Facebook can somehow monetise, despite insisting that it will respect the WhatsApp founders' desire to keep the service simple and clean of adverts.

The other theory is all about the data that could be mined from the 450 million users. "I suspect they've paid $16bn for a LOT of phone numbers," says one person. This argument sees WhatsApp user information fuelling Facebook's advertising business. And then there are others who point out that, as most of the deal is in shares, it just doesn't matter that much to Facebook as long as its share price continues to rise.

The most authoritative piece on why the sums add up has come from Jim Goetz at the venture capital firm Sequoia Capital, who gives us four numbers that tell the story. The 450 million active users - a number reached "faster than any other company in history". The number of engineers - 32 - in an extremely lean workforce. The one note affixed to a founder's desk that reads "No Ads! No Games! No Gimmicks!" And the $0 spent on marketing by a firm that has grown by word of mouth.

But the one number not given is the huge return that Sequoia Capital has made on the deal, as a very early investor in WhatsApp. Mr Goetz talks of the deal being "bittersweet" for Sequoia - though most us would feel rather more sweet than bitter about receiving such a huge mountain of money.

And what nobody has really explained is the maths behind this deal - why $19bn (that includes the $3bn that will eventually come to the staff) rather than $10bn or perhaps $40bn? Someone else messages me to say that $40-per-user is the standard rate you pay in this sort of deal - but precisely how that adds up is far from clear.

In traditional acquisitions a company is required to explain to its own investors exactly how future earnings will be affected by a deal - but these days that doesn't seem to apply to companies like Facebook or Google.

To the faithful this is small-minded carping. After all everybody laughed at the $1bn which Facebook paid for Instagram, and that is now accepted to have been a wise move - even though we have little data yet on Instagram revenues.

In the end, this deal has been done because Facebook can afford it - and perhaps because it wants to make sure nobody else can dominate the fast-growing social messaging industry.

But I'm old enough to have heard brave talk before of what a huge internet audience is worth, and why it is foolish to worry too much about revenue. That was back in 1999, and it did not turn out too well.


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