The Case for WhatsApp

Facebook recently announced its acquisition of WhatsApp for $16B in cash and stock, plus another $3B in RSUs.1 The acquisition was not surprising; mobile messaging is clearly of systemic importance to any mobile platform (except according to Twitter). However, the terms of the acquisition elicited some surprise, given Facebook’s recently failed attempt to acquire SnapChat for a more modest reportedly $1B. Putting aside its valuation for now, we should realize that WhatsApp’s strategic value to Facebook is substantive:

One might be tempted to define the acquisition in terms of technology or intellectual capital (32 engineers); however, WhatsApp’s value to Facebook is properly defined as user acquisition. The messaging app boasts 450M monthly active users, with an estimated 315M daily active users. This puts WhatsApp almost on equal footing with Facebook in terms of its active mobile user base. The significance of this position cannot be understated.

Facebook values WhatsApp at about $42 per user. A fairly uncontroversial value by industry standards.2 The $19B purchase price paid by Facebook is a function of WhatsApp’s size. Its growth rate created a closing acquisition window (think too big to buy). Seizing the opportunity means Facebook has diminished the competitive landscape for social platforms, insulating itself to an extent from platform disruption.

Facebook's mobile-only user base

More importantly, WhatsApp is primarily hired by emerging markets, particularly Latin America, Africa, India, and Russia. This suggests that the extent of user acquisition overlap with Facebook’s own user base is relatively low. WhatsApp gives Facebook access to a user base segment that is materially different than its current user base. This presents opportunities for emerging market ARPU growth primarily thanks to WhatsApps subscription model.

WhatsApp offers Facebook other less tangible benefits. WhatsApp’s usage is approaching global SMS volume; it is hired primarily to supplement more expensive SMS fees in emerging markets. In a sense, the acquisition pushes Facebook down the software stack3 opening up the possibility of more directly engaging with users on various mobile platforms, including potentially mobile payments. It also allows Facebook to expand the platform as emerging markets deploy robust infrastructure and services to satisfy growth.

However, the acquisition is not without risks. Low switching costs are both an asset and a liability. While WhatsApp may continue to attract users to its platform, increased competition in the messaging space driven partially by WhatsApp’s own valuation could pull users away from the platform. Platform stagnation could produce a similar effect, especially at the hands of arguably more intrepid competitors like WeChat.

Facebook has so far demonstrated itself to be responsible acquisition steward (if Instagram is indicative). That it is not interested in pursuing monetization is promising; this proposition allows WhatsApp to focus on user base growth and platform innovation. Facebook’s acquisition is prescient, reflecting an understanding by the company that its biggest opportunity (perhaps also its biggest risk) exists in high growth emerging market regions. How well WhatsApp positions Facebook in the long run remains to be seen.

Notes

  1. Facebook to Acquire WhatsApp, Facebook Inc., 2014.
  2. When eBay acquired Skype in 2005 its valuation denoted $46 per user. However, when Microsoft in turn acquired Skype from eBay in 2011 it paid a more substantial $150 per user. Arguably, SKype has not translated into significant platform growth for Microsoft. Although Skype’s user base is materially different than WhatsApp’s it illustrates the extent to which valuations are, partially, defined by intention. Even if we assume that Facebook’s intentions for WhatsApp are less lofty, the per-user valuation seems reasonable.
  3. Messaging is a fundamental component of the mobile platform. If WhatsApp can supplant the default SMS app on mobile devices in emerging markets it edges closer to the operating system layer, allowing for more direct service delivery and platform innovation.