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Wednesday, 23 July 2014

WhatsOptimistic

How on earth can Facebook justify WhatsApp price?

For mere mortals who haven’t partaken in whatever Kool-Aid Mark Zuckerberg is serving at Facebook’s Hacker Way headquarters, is there any way to justify the $19 billion it is paying for WhatsApp?

It takes extraordinary suspension of disbelief – and a new Breakingviews calculator – to see how the social network can bring the messaging startup’s valuation in line with its own.

How could Facebook justify WhatsApp's price tag?

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 doesn’t say what proportion of its customers pay. What’s 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, WhatsApp’s valuation boils down to how many customers will pay and how much they’ll 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 – well above today’s $1 a year charge – it would yield net income of $675 million in 2016. That’s equivalent to 28 times Facebook’s purchase price, the same multiple the market puts on the social network’s 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 Zuckerberg’s punchbowl.

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Context News

Facebook on Feb. 19 said it had reached an agreement to buy mobile messaging service WhatsApp for up to $19 billion in cash and stock. The social network led by Mark Zuckerberg is paying $4 billion in cash, about $12 billion in Facebook shares and $3 billion in restricted stock units, to be granted to WhatsApp’s founders and employees, that will vest over four years.

WhatsApp, founded in 2009, says it has over 450 million people using its service each month, 70 percent of whom are active on any given day.

Mark Zuckerberg, Facebook’s chairman and chief executive, said he believed that WhatsApp was on track to hit 1 billion users.

WhatsApp charges users $1 a year to use the application, after a one-year free period. The company declined to say how many customers pay the fee.

 

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