Last week, it was revealed that WhatsApp had brought in revenues of around $10 million USD in the first half of 2014. This begs the question – why would Facebook spend $18B on a company that is on track to earn only $20 million dollars this year? At its current value of over $200B, FaceBook is currently valued at around 17 times its annual revenues, a valuation that would imply that WhatsApp is worth approximately $340 million dollars. When companies make acquisitions, they typically have to pay a premium of around 20% over the market value (40% if the acquirer is a private equity firm). So what makes WhatsApp so valuable that FaceBook was willing to pay such a huge premium?
Historically, companies have made acquisitions for one or more of the following reasons
• To exploit ‘synergies’ i.e one company has a good product, the other has great distribution, hence joining forces results in a situation that is beneficial to both
• To take advantage of tax benefits i.e the rumored deal between Yahoo and AOL
• To diversify and achieve seasonal balance i.e. a company that makes snowmobiles might acquire a company that makes beachwear to ensure that revenues are stable throughout the year
• Defensive – to prevent competitors from acquiring the company
• To expand their business by gaining access to new markets, customers etc.
With WhatsApp, it’s likely that the last two factors were the most important. The last thing that FaceBook would have wanted is for a competitor such as Google to get its hands on WhatsApp’s users. Furthermore, it has been noted that many of WhatsApp’s users were in countries such as India (It was the leading messaging service in India when it was acquired) and maybe it was really a means of expanding FaceBook’s user base. Or perhaps it was a means to reach the fickle teenager segment of the market which is not taking to FaceBook in the same way as other age groups have. These are all good reasons, however it is likely that there were additional factors that were in play.
In my Social Networks class, Professor Mikolaj Piskorski made the point that the frequency of posting on FaceBook decreases as the network size increases. This makes perfect sense if you think about it. Imagine that you are in a room with a few close friends. It’s likely that you will feel comfortable discussing nearly any issue with them. Now imagine that your family (parents, siblings) joins in. The conversation is likely to be slightly more guarded. Next imagine your co-workers and your manager join in. You now have to think very carefully about what you say as everyone can hear you.
I started using Facebook in 2004. At that time, it was only accessible to those in the United States with university email (.edu) accounts. Privacy controls did not exist (everyone in the University had full access to your profile) and yet, users shared content freely as they knew that the only ones viewing what you had posted were other students. As FaceBook opened up access to everyone, people started to become more cautious about what they posted. Photos that showed students drinking and partying were hastily removed as parents and potential employers were granted access to the site and users became much more careful about what they posted.
This is a huge problem for a company such as FaceBook. People visit Facebook several times a day because they expect to see updates from their “friends”. If people are posting less and the updates are less frequent, the time spent on the site will surely drop. One can still post status updates and photos and limit them to specific friends, but this process is unintuitive and tedious and there is always the danger that a friend will share a post with someone that it is not intended for. Furthermore, The less content you post on Facebook, the harder it becomes for the company to serve well targeted ads to you (FaceBook also tracks your behavior on other websites through cookies, the ‘Like’ button, and FaceBook Connect. This data is then used in order to show you relevant ads when you return to FaceBook).
It is likely that the acquisitions of WhatsApp and Instagram were aimed at alleviating this problem. In smaller groups, people are much more likely to revert back to the behaviors of the early FaceBook users. This is certainly true for me – I post much more frequently on WhatsApp than I do on FaceBook. Recently FaceBook relaunched Atlas, which is an advertising platform that will enable it to use the information it has on users to show them relevant ads on third party (non FaceBook) sites. Though the company currently does not scan and use the information from your WhatsApp messages to show you ads, that could very well change in the future and may represent a potential source of revenue that would justify the huge price paid for WhatsApp.
Product Management From Scratch 