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.This guy is hilarious. Didn't we hear this sort of thing in 2007? This time it's different!
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.
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.