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Offer of an Astonishing Amount

Some weeks ago, it was announced by Facebook that they were acquiring WhatsApp for an astonishing sum of $19 billion.

It seemed an astronomical amount to pay for a small organization of merely 55 employees. WhatsApp is a free download having a user base of around 450 million and it is still growing strongly on a daily basis. This could be due to the free business model of the application, and also because it does not accept any advertising. It charges the users only a small amount of $1, after providing them with an initial free service for a year. On the face of it, it seems that the application will surely not provide the returns to match the investment made by Facebook or the price paid for it.

High Pricing

What in the world was Mark Zuckerburg thinking about when he offered this amount for WhatsApp? There might be other factors other than the traditional revenue and earnings behind this offer. There are some social media services, such as Facebook and Twitter, which are based on advertisements, whereas there are others like Netflix, which are based on subscriptions. There are still others that are a combination of subscription and advertisements, such as LinkedIn and Pandora. However, what is common to all these social media businesses is that they have a high market pricing and earn a very small or even negative earning most of the time.

Vast User Base

The variable in all these companies is the number of users or the number of subscribers. Investors will prefer to pay a greater amount to companies that have a bigger user base. The price of the company will be higher if it comes from subscriptions, as these are predictable revenue, rather than from advertising, which is less predictable.

When analyzed in this manner, it becomes very clear why Facebook was ready to pay such an astronomical amount for WhatsApp. Facebook has a user base of 1.2 billion and is much bigger than any other social media service. The value of the service increases with the number of users; the time users spend on the service and how much this user base increases with time. Facebook finds the acquisition of WhatsApp very attractive, as it will bring in new users to Facebook and the users will also start engaging to a greater extent in the Facebook environment. However, it is true that there are many WhatsApp users who are already on Facebook, but there still might be millions of WhatsApp users who are not on Facebook.

The Risks

So, is there any risk involved in buying WhatsApp for such an astounding amount? There are some risks, as it might be true that the market has overpriced the value of WhatsApp and it might not be very useful in the future. However, Facebook is protecting itself as the payment of $16 out of the total $19 billion is being made from its own stock. The failure or the success of this move will depend on the market mood as well as the momentum, and this, as we all know, can shift very abruptly one way or the other.

Monetizing WhatsApp

The amount of $19 billion overpowers all other aspects of the Facebook WhatsApp deal, with many people wondering how the buyer is going to monetize it and get returns on its investment. It is very clear that WhatsApp has been attained for its 450 million users rather than for monetization. Facebook gets revenue from advertisements, which forms the bedrock of the social networking site, whereas owners of free WhatsApp are against such advertisements on the application. The acquisition of WhatsApp is high on strategic value but rather low on monetary value and it is difficult to justify it at present.

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