I have been asked my opinion on why Facebook bought WhatsApp a lot in the last week. I mean $19bn is a big number after all. How can a simple app be worth more than many huge corporations that have a history of making money and arguably have bigger customer bases? I will admit that I do not have the answers, but I have my theories.
First, there has been a lot of talk recently about the under 30 demographic leaving Facebook in droves. Well I don't know if droves is the right word, but many organizations rely on a metric called "churn" as their main metric, especially Facebook that gets paid by having a large number of eyeballs to create clicks on advertising to make its money. So the negative churn of the younger demographic has to be a concern to Facebook. Where are all the Gen X folks going? They are going to apps, mostly messaging apps. These messaging apps are building platforms on top of their basic messaging functionality. This scares Facebook. So they are going with the Microsoft strategy of buying up the competition. The big problem I see is WhatsApp isn't the only platform that has a large user base in the messaging space. So if customers are running from Facebook, then those customers will have lots of alternatives to jump from again, which will end up costing Facebook a lot of money.
Second, the valuation of companies based on a per customer basis may not be the best metric to use. I have heard Facebooks value as a company is equivalent to $140 per customer, they paid $105 per for WhatsApp. That sounds like a great deal right? The first issue I see is the WhatsApp and Facebook customer base is not mutually exclusive. Some, and I would venture to guess, most of WhatsApp customers are already in the Facebook database. So what is the real valuation under this model? Do you take only the customers that aren't in the Facebook database? Lets say that is 30%. Then all of the sudden the WhatsApp purchase is valued at $350 per customer. Very over priced.
Third, the biggest bubble I see is the value of large groups of people that aren't willing to buy anything to be a part of the database. Lets take WhatsApp for instance. In an article by Bloomberg Technology, WhatsApp has cost phone providers a lot of money in text messaging revenues
Free social-messaging applications like WhatsApp cost phone providers around the world -- from Vodafone Group Plc (VOD) to America Movil SAB (AMXL)and Verizon Communications Corp. -- $32.5 billion in texting fees in 2013, according to research from Ovum Ltd. That figure is projected to reach $54 billion by 2016.
That's a lot of revenue being lost. The problem with these customers is they are looking for "free" alternatives to not pay the text messaging fees. I don't know about you, but I hate basing my business off of people that avoid having to spend money, I'd rather have a customer base that spends money. Most of these customers are young, which tend to not be a loyal group of customers. They will jump ship at the first sign there is something new and different. So not loyal and looking to avoid spending money, not the customer base I would spend $19bn for.
As you might see I am not a big fan of this deal. Of course it will take time to see how this plays out, but I can't see how this will ever make sense for Facebook. To spend $19bn on something I would want to get $100bn of worth from the deal, I don't see that happening. I think Facebook has knee jerked a couple of transactions as of late and it will be interesting to see how that plays out. This is a lot of money for technology that is easy repeatable. Should be interesting.