The Whatsapp acquisition: Demystified

Facebook’s recent purchase of the messaging service, Whatsapp, has a lot of people asking the question, did the social media behemoth overpay? And more specifically, what does Facebook stand to gain from the acquisition? Let me break it down for you.

First off, let’s put things into perspective: $19 billion is a lot of cash. That figure is roughly four times the yearly funding for cancer research in the US. So why are Zuckerburg and friends willing to spend $19 billion on a messaging service? What makes Whatsapp so valuable, and why didn’t anyone else match the bid?

One more thing you need to understand before I can answer that question. Whatsapp is a service that allows you to create an account that is tied to your smart phone’s 10-digit number, and send multimedia messages using data, apart from the sms or mms service that is provided by your wireless provider. The first key thing to note here is that the technology and application have no intrinsic value to Facebook. There is no secret sauce that is being bought. Facebook could recreate this service, brand it better, and roll it out in the blink of an eye (hyperbolic, but bear with me). Whatsapp does not show ads, so there is not an opportunity for huge ad revenue either.

So what exactly does Facebook get from the acquisition? Well to start, Whatsapp currently has 450 million subscribers. This acquisition is entirely about the users that Facebook is buying, and all of the data that comes along with them. Facebook makes revenue off of selling its users data. Each user is worth an average of $5 a year. Compare this to Google, where each user profile is worth roughly $20 a year, and we can assume that the information provided to Whatsapp falls somewhere in between.

Another piece of this very expensive puzzle is the gap in Facebook’s knowledge about its users. “Dark Social” is a term for the communication and sharing of content through private messaging. This makes ROI for social media efforts extremely difficult to calculate, and have led industry professionals to develop all types of models for estimating the sharing that goes on behind the scenes. Facebook knows what you like publicly. It also knows what you like privately enough to talk about on Facebook chat. But what about the hobbies that you’re talking with a “friend” about, but wouldn’t share online? Now Facebook knows all about them (as do the companies that purchase that information).

But the marriage of information from Facebook and Whatsapp don’t just simply sum. There is additional, synergistic value created from owning the data from both channels. Let’s make the assumption that your data’s value is $5 and $10 for Facebook and Whatsapp respectively. When pairing this data together, the information could give insights that are worth $20. This principle illustrates why the utility for the purchase is higher for Facebook than it is for any other company. If you had $19 billion lying around, I would not suggest that you pay the same amount for Whatsapp if Facebook were willing to sell it to you.

Whatsapp recently instated a new subscription policy that requires users to pay one dollar per year. This is obviously a small drop in the bucket for Facebook, but these “pennies” do add up. From subscriptions alone, Facebook should be expecting to incur an annuity of somewhere between $450 million and $1 billion for the following couple of years.

There are several benefits of the deal that are very hard to put a price tag on. What is the value of eliminating a huge threat to Facebook’s prosperity? What is the Whatsapp predicted growth estimated by Facebook stakeholders, and what is the present value? What is the utility of expanding the European market? There are too many moving parts, and it is entirely too early to tell whether this was a smart acquisition by Facebook or not.

Surely I am not alone in believing that a multi-billion dollar company may have some sort of game plan.

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