My name is danah boyd and I'm a Principal Researcher at Microsoft Research, a Research Assistant Professor in Media, Culture, and Communication at New York University, and a Fellow at Harvard's Berkman Center for Internet and Society. Buzzwords in my world include: privacy, context, youth culture, social media, big data. I use this blog to express random thoughts about whatever I'm thinking.

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Can someone explain WhatsApp’s valuation to me?

Unless you were off the internet yesterday, it’s old news that WhatsApp was purchased by Facebook for a gobsmacking $16B + $3B in employee payouts. And the founder got a board seat. I’ve been mulling over this since the news came out and I can’t get past my initial reaction: WTF?

Messaging apps are *huge* and there’s little doubt that WhatsApp is the premier player in this scene. Other services – GroupMe, Kik, WeChat, Line, Viber – still have huge user numbers, but nothing like WhatsApp (although some of them have even more sophisticated use cases). 450M users and growing is no joke. And I have no doubt that WhatsApp will continue on its meteoric rise, although, as Facebook knows all too well, there are only so many people on the planet and only so many of them have technology in their pockets (even if it’s a larger number than those who have bulky sized computers).

Unlike other social media genres, messaging apps emerged in response to the pure stupidity and selfishness of another genre: carrier-driven SMS. These messaging apps solve four very real problems:

  • Carriers charge a stupidly high price for text messaging (especially photo shares) and haven’t meaningfully lowered that rate in years.

  • Carriers gouge customers who want to send texts across international borders.
  • Carriers often require special packages for sending group messages and don’t inform their customers when they didn’t receive a group message.
  • Carriers have never bothered innovating around this cash cow of theirs.

So props to companies building messaging apps for seeing an opportunity to route around carrier stupidity.

I also get why Facebook would want to buy WhatsApp. They want to be the company through which consumers send all social messages, all images, all chats, etc. They want to be the central social graph. And they’ve never managed to get people as passionate about communicating through their phone app as other apps, particularly in the US. So good on them for buying Instagram and allowing its trajectory to continue skyrocketing. That acquisition made sense to me, even if the price was high, because the investment in a photo sharing app based on a stream and a social graph and mechanism for getting feedback is huge. People don’t want to lose those comments, likes, and photos.

But I must be stupid because I just can’t add up the numbers to understand the valuation of WhatsApp. The personal investment in the app isn’t nearly as high. The photos get downloaded to your phone, the historical chats don’t necessarily need to stick around (and disappear entirely if a child accidentally hard resets your phone as I learned last week). The monitization play of $.99/year after the first year is a good thing and not too onerous for most users (although I’d be curious what kind of app switching happens then for the younger set or folks from more impoverished regions). But that doesn’t add up to $19B + a board seat. I don’t see how advertising would work without driving out users to a different service. Sure, there are some e-commerce plays that would be interesting and that other services have been experimenting with. But is that enough? Or is the plan to make a play that guarantees that no VC will invest in any competitors so that all of those companies wither and die while WhatsApp sits by patiently and then makes a move when it’s clearly the only one left standing? And if that’s the play, then what about the carriers? When will they wake up and think for 5 seconds about how their greed is eroding one of their cash cows?

What am I missing? There has to be more to this play than I’m seeing. Or is Facebook just that desperate?

(Originally posted at LinkedIn. More comments there.)

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10 comments to Can someone explain WhatsApp’s valuation to me?

  • Chris

    I think it’s a combination of things – Facebook have effectively bought 450million phone numbers, and the social graph attached to each of those. And the geographic popularity of Whatsapp and Facebook are pretty divergent, so they’ve probably bought themselves hundreds of millions of users that aren’t yet connected to FB. If Whatsapp keeps growing, they’ve effectively bought themselves a dominant share of the social network market in countries where their foothold was previously weak. They’ve also bought a small but seemingly very effective engineering team that can create services that scale massively. And they’ve kept Whatsapp out of the hands of other companies that might have been interested. But even considering all of that $19bn still seems ridiculously high to me.

  • Messaging apps have strong network effects since their value derives primarily from their network. Facebook is betting that Whatsapp will be able to crowd out it’s competitors through the strength of it’s network. Facebook’s philosophy seems to be if it can’t be the primary social platform, it should at least own the primary social platform.

  • jkd

    If you look at it at a very simple level of cost per user, they paid $42/user for this deal after $28/user for Instagram. Maybe they had data that showed a greater chance of WhatsApp users not being Facebook users (and especially, greater than Instagram) – if so, it *might* just be a straightforward lifetime value calculation.

    I don’t buy it. To me this reads as recklessness and cronyism, and would never be accepted if Facebook had a real Board with actual oversight. But they don’t, so what Zuck says, goes.

  • Ged

    Hi Dana,

    The following two articles may help partly explain this. Part of it is down to the fact that not all money is created equal:
    http://renaissancechambara.jp/2014/02/20/the-whatsapp-facebook-post-part-i/
    http://renaissancechambara.jp/2014/02/20/the-whatsapp-facebook-post-part-ii/

  • yylai

    Benedict Evans has an insightful analysis of it, http://ben-evans.com/benedictevans/2014/2/19/whatsapp-and-19bn and the perspective of “is this worth 10% of Facebook?” with the potential of being a channel for mobile discovery and acquisition (whatever that means..)

    But I had the same thoughts on the whole “desperate” feel to it and just a lot of money chasing very few available goods.

  • What FB paid for are network connections. FB has lots of knowledge about digital connections between people already (email address, friends, friends of friends, social graph, etc.), but not a lot of information about what communication happens outside of the digital space. With WhatsApp having become a viable competitor for SMS & MMS, bypassing the wireless carriers’ excuses for not innovating (don’t poke a dead cash cow?), 1/16th of the worlds population uses this one app as a real-time, personal, private, communication channel. Messages on the app provide temporal, geographic, and social network metadata that FB has neither access to nor the ability create. A couple years ago, FB tried to gather everyone’s contact information via their phone’s contact lists, the backlash forced them to delete everything they uploaded. In terms of being THE primary communication channel between friends, FB had little choice, buy them or be excluded.

    Personally, I think WhatsApp should have started licensing access and created a secondary marketplace around their primary and derived data.

    IMHO,
    Randall

  • I think the value FB paid for WhatsApp is probably the result of a combination of (strategy) factors.

    FB is buying all components of the mobile OS they don’t have, the messaging (SMS/MMS) feature is a crucial one particularly among the youngest generations (a segment FB is not that strong in) and in specific locations or geo-dynamics (cross border, separated families, etc.). It’s easy to imagine the feature somehow being integrated in a ‘traditional’ FB experience. There’s an interesting piece on the cost of not having a mobile OS related to this acquisition: “Facebook Price for Having No Phone OS? $19 Billion. A Must-Have Apps Play? Priceless.” (http://recode.net/2014/02/19/facebook-price-for-having-no-phone-os-19-billion-a-must-have-apps-play-priceless/).

    How much would it cost to build, and then agree with device makers for distribution/users for adoption, a mobile OS from scratch?

    Of course, as somebody commented, FB also bought mobile numbers, and those can be now matched to FB accounts (for those that weren’t already providing that information); in terms of advertising, is not just a matter of displaying direct ads within the app, instead is the insight that can be gathered from (metadata) information that can now be (again) matched/cross referenced with FB accounts to give an (even) more detailed understanding of users habits. And users’ movements. Foursquare integration, maybe?

    Finally, how much would have it cost to FB if Google bought WhatsApp?

  • John

    You do realize that it’s Sequoia Capital on both sides of that merger and they have just extracted 16b from the stock market with nearly no market value loss at all?

  • Youyang Hou

    If you look at WeChat, the Chinese equivalent of Whatsapp, you will understand the great potential of such mobile message app. WeChat now support online payment for anything, including taxi; it supports group chatting, social game, micro blogging etc. Many business models can be accomplished through such platform. I think Facebook is smart enough to see the great business potential in Whatsapp.

  • SPJD

    From Rolling Stones interview with Bill Gates yesterday:

    RS: If there’s a deal that symbolizes where Silicon Valley is today, it’s Facebook’s $19 billion acquisition of WhatsApp. What does that say about the economics of Silicon Valley right now?

    BG: It means that Mark Zuckerberg wants Facebook to be the next Facebook. Mark has the credibility to say, “I’m going to spend $19 billion to buy something that has essentially no revenue model.”
    I think his aggressiveness is wise – although the price is higher than I would have expected. It shows that user bases are extremely valuable. It’s software; it can morph into a broad set of things – once you’re set up communicating with somebody, you’re not just going to do text. You’re going to do photos, you’re going to share documents, you’re going to play games together.

    RS: Apparently, Google was looking at it.
    BG: Yeah, yeah. Microsoft would have been willing to buy it, too. . . . I don’t know for $19 billion, but the company’s extremely valuable.

    http://www.rollingstone.com/culture/news/bill-gates-the-rolling-stone-interview-20140313

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