What does the Facebook acquisition of 'WhatsApp' signal to all of us?

Last Call

marcfrey150Can a company, which was started in 2009, has 55 employees and no revenues be worth $19 billion dollars? The answer is YES, and NO depending on how you look at it.

For traditional thinking investors, this valuation defies everything we thought we knew about how to value a company. As a comparison, companies with similar market valuation include: HJ Heinz, CBS, Yahoo!, PG&E, Charles Schwab, Marathon Oil, Allstate, Kellogg, T. Rowe Price, Sun Trust to name a few. Mostly companies with strong brands that have been around for a long time and have a proven track record.

To put things in perspective, we have to understand a few things: WhatsApp is an instant messaging subscription service for smart phones. The reason it got popular with 450 million users all over the world is, that mostly young people value its simplicity (it identifies the user via the phone number and networks it with all other phone numbers on your device), its cheap because it bypasses the text message charges of wireless companies, its ad free and it does not collect data about the user. It In other words, it is a much better networking platform from a user’s perspective if you value your privacy and have no need to have a permanent hall of fame (and in some instances shame) permanently posted on the web in places like Facebook.

So what is the business model of WhatsApp? One thesis would be to acquire a ton of users and eventually make it a paid subscription service. So in theory if all its current users were willing to pay $1 a year the company would have revenues of $450 million. Obviously that is a big if and is a HUGE bet on the future. For the time being Facebook promised to keep WhatsApp advertising free and if it doesn’t users might jump to another platform as quickly as they joined, because one lesson is clear — there is no brand loyalty among the “connected generation”.

It also signals that the world of mobile connectivity is moving so fast that the only way giants like Facebook and Google can keep pace in their continuous quest of world domination in that space is via costly acquisitions. If you are reading into this that Facebook is loosing market share with younger audiences you are correct. So in essence whatever seems hip today might not be hip tomorrow. The positive side is that consumers seem to get smarter and are starting to opt out of free services if they feel that their privacy gets compromised.

Another significant factor is that $1billion dollars does not have the same value for companies, let’s say like Ford Motors that have built a business over a 100 years and its market valuation is around 10 times its profits, versus Facebook that took a mere decade to achieve a comparable market valuation but it is derived by multiplying its profits 100 times. With other words Facebook is playing on a different playing field (with funny money?) one that is made up between clever minds at Wall Street and Silicon Valley.

The last time such an absurd transaction happened was when Internet startup AOL bought Time Warner. It worked great for the newcomers but not in favor of shareholders in the legacy company. It also was the tipping point for what later became the 2000 dotcom crash. No matter how you look at this you have to scratch your head and wonder if all of our ingrained thinking has all of sudden become a thing of the past and if all of our big ideas have become insignificant in the blink of an eye.

Simply put this could be a mere exclamation point (!) signaling that we live in a time in history where the pace and scale of change continue to accelerate into spheres that challenge all of our current reasoning.


Please send your comments to my email at mfrey@freymedia.com. I would like to get your feedback on this important idea.