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Saturday, February 22, 2014

I really don't get this whole Internet thing

CNN Opinion: WhatsApp is well worth $19 billion
One of this week's most astounding stories is Facebook's acquisition of WhatsApp, a mobile messaging service that has more than 450 million monthly active users globally. The $19 billion that Facebook will spend on buying WhatsApp created a collective jaw-drop in the tech world.

Sure, the price tag is getting a lot of buzz -- $19 billion is a historically big number for a venture funded company. But what exactly is Facebook getting out of it?

A company just a few years old with less than a billion dollars in revenue and a service that is nearly (but not quite) free.

Is all of that worth so much money?

Just as with the acquisition of YouTube by Google for $1.65 billion or Facebook's purchase of Instagram for $1 billion, many people simply have a hard time wrapping their mind around an acquisition of a service that doesn't fit with traditional valuation principles.

In the old world, company valuations were based on a multiple of revenue or free cash flow, while also factoring growth over time. But in the new world of Internet and social media, revenue is often something that will come later as the result of hyper growth, and traditional valuation techniques don't apply.
This guy is hilarious. Didn't we hear this sort of thing in 2007? This time it's different!

WhatsApp is apparently a company that services a lot of "emerging markets" by offering an instant-messaging service for something like $ .99/yr. WhatsApp does not run ads but we'll see how long that lasts. In other words, WhatsApp and its 55 employees make money scrambling for a few pennies from customers who are so far down the food chain that they can only get these crummy cell phone plans that will gouge them for their text-messaging.

For $19 billion and a little bit of financing, you could just buy T-Mobile. Nineteen bajillions for an IM service that doesn't run ads? What happens when the cell phone providers figure this out and start offering "free" text messaging? What's keeping Skype, Viper, or any other company from offering this?

I just don't see it. But then again, if I were so smart I'd be an Internet billionaire so maybe somebody can explain how wrong I am.

4 comments:

Northern Refugee said...

Its actually very simple: the Fed is printing money. It has to go somewhere. Right now that "somewhere" is internet stocks. Why does this sound do familiar?

Anonymous said...

In other words, WhatsApp and its 55 employees make money scrambling for a few pennies from customers who are so far down the food chain that they can only get these crummy cell phone plans that will gouge them for their text-messaging.

Yes but consider that the marginal cost of servicing another customer is basically nothing. And there are lots of customers.

The Anti-Gnostic said...

Then that means there's nothing stopping anybody else from hopping in the game.

Anonymous said...

Yes barriers to entry are low in a sense since anyone can make something similar. On the other hand it's often hard to get people to switch from something they're used to even if you have a better product.