Did Facebook overpay for Whatsapp?

When Facebook agreed to pay up to $19 billion for WhatsApp last week, it set an unprecedented value on what is simply a mobile app – indeed, unlike iMessenger or Google Hangouts, WhatsApp is not available on the desktop.  WhatsApp has nearly 450 million users, but only made $20million in revenue last year – so did Facebook overpay?

The case for it did?

(1)  The principal argument that supports the case that Facebook must have overpaid, is that WhatsApp is fiercely opposed to the advertising business model which forms the foundation supporting Facebook’s own tremendous valuation.  WhatsApp has a subscription business model of the first year free, then $0.99 a year for new users.  This caps the value of that user to the platform, whereas with an advertising model the only cap is what advertisers are willing to pay to reach that user.

(2)  WhatsApp is fighting in a very crowded market, in which it is easy for a user to switch to a different messenger.  This is partly true – there are certainly strong, free competitors out there in the form of Google Hangouts, iMessenger, BBM, Line, WeChat, Kik, Telegram – indeed the list can seem almost endless.  Telegram in particular were very focal last week in reporting a surge of downloads, particularly in Germany after the Facebook acquisition was announced.

The counter to this argument, is that most users are unlikely to switch – my overseas family and I all use WhatsApp, whilst we use Google Hangouts as a team at AppInstruct – whilst it’s easy for me to switch between messengers, my motivation for doing so is less, if I’ll then need to persuade, say my family, to also do so.  Zuckerberg bought WhatsApp because he realised Facebook Messenger, at about 125 million users, could never now catch up.

The case that it didn’t?

(1)  WhatsApp really is the new Facebook, in that it creates a way for people to share content and thoughts with their nearest and dearest in a private & immediate fashion.  With the maturing of Facebook’s platform, it has encountered problems of people being connected through it to far more acquaintances, than close friends.  WhatsApp is beginning to own these closer, more valuable interactions.  By buying WhatsApp, Zuckerberg has removed his greatest competitive threat.

(2) WhatsApp has won the messenger wars – at the time of the acquisition, it was growing at 25 million new users a month – almost a million a day – which means it may surpass Facebook’s own user base by as early as the middle of next year.  Facebook had a billion users at the time of its own IPO and was valued at $100billion – in a year’s time, WhatsApp may have been too valuable to be acquired.

(3)  Twitter was valued at $14billion in its own recent IPO, yet it has half the number of users of WhatsApp, who open the app less often, and are not as engaged within the app.  It would be surprising if the IPO valuation of Twitter did not influence the negotiations between Zuckerberg and Koum.

(4)  Facebook paid approximately $37/user when it acquired Instagram, and is paying around $40 a user on this occasion – it’s just that WhatsApp has many more users.  That Instagram deal has since looked a bargain, with it growing from around 30million users, to 150million users.  In 3 years, this deal may look a bargain too.

(5)  There’s only $4billion being paid in cash, with $15billion coming in the way of Facebook shares, with $3billion of these yet to be earned.  So, if Zuckerberg has gotten it wrong, the Facebook shares will fall in value and with them, the price paid for the transaction.  WhatsApp’s founders and employees will still have made an incredible return and all be millionaires – so everybody wins, even in the worst case scenario.

(6)  Internet.org – Zuckerberg’s not for profit, with the stated intention of getting the whole world online, is what brought the two CEOs together for the conversation which ultimately led to the merger.  This transaction unquestionably helps the goal – Whatsapp is a much simpler app than Facebook’s own mobile app, it also provides a service (near free communication via small amounts of data) perfect for the developing world that the two men are aspiring to bring online.  WhatsApp is winning in India, expect it to do likewise in Africa.

(7)  Facebook’s now has a market capitalization of around $175billion, with thousands of employees, many of which are talented engineers and designers.  WhatsApp on the other hand, had around $50million in venture funding and 50 employees.  Providing WhatsApp with access to Facebook’s technical resources is only likely to make it better – more reliable, faster, better able to reliably scale its infrastructure.  So, a WhatsApp owned by Facebook is likely to be a better more valuable service, than a WhatsApp continuing to grow on venture funding.

So, on balance, it seems likely that history will view this as another (Instagram) shrewd acquisition by Zuckerberg and Facebook.  What’s more, these deals and the rumoured interest of Google, as well as Facebook itself, in Snapchat, demonstrate that if you create a unique experience of mobile that users’ engage with frequently and in great numbers, you’ll have built something that the technology titans will place great value upon.

A good idea, well executed and five years later a $19 billion company – it’s these opportunities that prompted us to create our Course teaching non-technical people how to go about turning their app ideas into an app.  To learn how to make an app with your own idea, then start on a free trial with the first Course tutorial today.

Nicholas Wright wrote on

Nicholas is a co-founder and CEO of AppInstruct. Nic is actively involved in the start-up space, mentoring other founders with mobile, fundraising and legal advice. Nic's favorite app is WhatsApp, which allows him to remain in contact with family in America and England.