A week after Rakuten purchased Viber, Facebook, not to be outdone in the expanding messaging market, has agreed to purchase WhatsApp. For those who might not know what WhatsApp is, the simple answer is a mobile app that allows people to send unlimited international text messages for $1 per year.
There are, obviously, a few oddities about this purchase. First, it is always surprising to hear that people are using SMS internationally. Clearly, when having to pay for a service for SMS when services like KIK are free, there must be something going on. In this case, it has a lot to do with device integration and service stability abroad. SMS is built-in on the phone, whereas KIK is not.
However, Facebook messenger is integrated into many devices and looks just like a standard text message. This purchase might be a way to allow Facebook to live on both sides of the integrated messaging system for phones worldwide.
The other major oddity is the massive pricetag. When Facebook skirted regulations a little to purchase Instagram during their IPO quiet period, the pricetag was $1 billion. That number seemed inflated, but since everyone seemed to be using the service, plus Twitter was actively trying to purchase the company, it made sense. A large userbase, one that was being stolen almost directly from Facebook, plus their biggest competitor in tasks for a buyout equals a bigger cost than its actual value.
So, with Instagram being overinflated at $1 billion, how did we get to $16 billion for a niche messaging app? Mark Zuckerberg, Facebook CEO said,
WhatsApp is on a path to connect 1 billion people. The services that reach that milestone are all incredibly valuable. I've known Jan for a long time and I'm excited to partner with him and his team to make the world more open and connected.
Jan Koum, WhatsApp co-founder and CEO, said,
WhatsApp's extremely high user engagement and rapid growth are driven by the simple, powerful and instantaneous messaging capabilities we provide. We're excited and honored to partner with Mark and Facebook as we continue to bring our product to more people around the world.
So, lots of people means lots of value? I suppose, with Instagram being a free service and WhatsApp being a paid service, there will be a differing value on engagement. On average, tech startup multipliers range in the 6-10x range, meaning that the value of the company is 6-10 times the annual revenue of the company. With nearly 1 billion users and the high-end of the range, we can account for about $10 billion; so where did the other 6 come from?
First, Facebook is known for purchasing top development talent. While I have never used WhatsApp, I can assume there are people on the team that Zuckerberg wants on his team. That will increase the price some. In addition, there is a lot of interest in the messaging market, as we discussed last week. With uncertainty in the market and a large purchase last week, that will make the price spike as well.
So, is the $16 billion price reasonable or completely insane? Let us know your thoughts in the comments.