Quick Thoughts: Facebook Buys More Users and Usage
– At $19B in cash, stock and future stock grants, FB is paying more than 10% of its enterprise value for WhatsApp, its 450M monthly active users and 55 employees.
– Strategically, WhatsApp is a great fit, with extremely strong penetration and engagement in markets where FB is relatively weak, like India and Latin America and a clear monetization path
– The strategy of separate focused mobile apps is spot on – WhatsApp for messaging, Instagram for photos, Paper for news dissemination – controlling footprint and usage on others’ platforms.
– This is a VERY bold move, but WhatsApp will deliver real long-term growth and FB may have enough short term business momentum to cover for the almost certain and substantial dilution.
Wow! Mark Zuckerberg is not playing it safe. WhatsApp has been on fire, going from 0 to 450M users in less than 5 years, now serving more messages than all of the Earth’s wireless carrier SMS systems combined. The service is particularly strong in emerging markets – According to The Information, 55% of Indians, 63% of Brazilians, 72% of South Africans and 76% of Mexicans surveyed by Jana Research reported WhatsApp as their most used messaging application, while Facebook didn’t top 6% in any of those markets. No mystery that Facebook would be interested in buying the company, but after seeing Twitter’s big move out of its IPO and having had Snapchat turn down a rumored $3B offer, the real question was whether it was too late to get WhatsApp at a price that Zuckerberg was willing to pay.
Apparently it was not too late. $19B got the job done, including $4B in cash (that is more than a third of Facebook’s cash on hand) and $3B in restricted stock grants to keep those 55 employees locked in for the next 4 years. It’s a big price, and even though WhatsApp has a working revenue model with advertising and content distribution sales apparently growing quickly, it is almost certain to be hugely dilutive for the first year or two. Of course, Zuckerberg may be pretty confident in Facebook’s ability to drive its own profitability ahead of the street’s fairly cautious expectations, and thus, cover up for the WhatsApp earnings drag.
Valuation and dilution aside, this is a great long term strategic move for Facebook. Early on, I was critical of the company for its monolithic, single application strategy and questioned whether or not serving so many different purposes from a single service would weaken its value to both users and advertisers. I’ve since grown more confident in Facebook, in large part because of its shift to a multiple app strategy. Instagram is a great standalone app for photo and video sharing, strengthened by its ties to the Facebook social graph and ad sales engine. Paper is a fascinating play to repackage Facebook’s content sharing functionality into a new, focused mobile app. WhatsApp now becomes a focused messaging platform.
With an archipelago of high value, standalone apps, all tied together with that social graph secret sauce, Facebook can effectively compete for user time and homepage placement on the mobile platforms controlled by others. Apple or Google may favor their own solutions and integrate them into their platforms as default functionality, but Facebook can control enough share of mind to make that much less of a threat. WhatsApp and its 450M users will be a BIG vehicle to get Facebook to that future.
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