The fail of an empire: FB buys Whatsapp
All empires must end. And if living through the last 20 years has proved anything it's that the rise and fall of tech empires are escalating at an alarming rate. This is no more evident than in the world of social media and mobile applications.
Yahoo, AOL, Instant Messenger, ICQ, Six degrees, Friendster, Tribe, Myspace, Second Life, Bebo are just few of the many stars that have fallen from the sky of social media success.
The internet and mobile technology have done many great things for the world, but one of the side-effects of having everything our fingertips is that we have become finicky fair-weather consumers. Abandoning and adopting new things is so effortless now that the slightest breeze of change can send a favorite app straight to the dusty trash-bin. Facebook, like the tech darlings that preceded it, is feeling this firsthand and they are trying to buy their way out of extinction.
A diversified portfolio of social media experiences is not bad strategy to offset a primary experience's decline (AOL and YAHOO did the same thing when they both transferred from their primary business models into the publishing model they're both struggling with today). And while Instagram's evaluation and purchase made some sense, Whatsapp just seems like a desperate Hail-Mary pass at trying to stay relevant. We've all heard the 19 billion dollar number explained—defended and in some cases described as a "steal." But let's be rationale for a moment: 19 billion dollars is crazy. Bat shit crazy. Howard Hughes Spruce-Goose crazy. Let's break it down:
What is Whatsapp?
Whatsapp is a simple and direct cross-platform messaging service (text, pic, video, and voice) that has 450+ million monthly active users and at its current rate of growth is on track to have a billion active users by early next year.
How is it different?
Other than the fact that Whatsapp claims a relentless pursuit of the purest user experience, they collect no user data. No names, No messages, no profile info, no tracking. Just your phone number. That is pretty different.
How do they make money?
The revenue model is subscription $1 a year (though the have only started rolling this out on a limited basis) and have only pulled in 20 million in revenue to date.
The app itself is solid functionality if you prefer to do most of your communication through SMS or are trying to avoid carrier based SMS fees. But even with it's premium functionality, projected active user base, and smart revenue model it isn't worth $19 billion. Not. Even. Close. Why you ask? Well, If we look at other social media companies evaluations, they have been based on what the dollar value of of an individual user (usually divided between advertising and data mining revenue potential)
According to CNN Money's David Goldman, "Facebook is spending $42 per WhatsApp user … LinkedIn's (LNKD) share price values that professional social network at $153 per user. Twitter trades at $140 per user, and Facebook is at $123."
Considering the current and projected user base, it seems like a steal right? But is it? Whatsapp doesn't collect any user data and according to Zuckerberg it will not introduce an advertising model. So the only value of an individual user is their subscription model: A $1 a year. If we assume the natural lifespan of a Whatsapp user is a generous 5 years, then the value per user is $5. So if we assume a billion users (it's easier math) that's a $5 billion dollar valuation. And considering most users are adopting Whatsapp and its competitors to avoid SMS text charges, it would just take carriers to augment their business model (free texts, etc.) to derail this categories success.
So why did Facebook overpay? Do they know something we don't? Is just the ill-conceived actions of a company desperately trying to buy relevance? That is 19 billion dollar question. But one thing is certain. Whatsapp just won this decades golden ticket.