What is Facebook Thinking? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 22 February 2014
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
This week, Facebook announced its purchase of the messaging service Whatsapp for the staggering sum of 19 billion USD. Whatsapp has a total 55 employees, meaning that each employee is making an average of 350 million USD as a result of the deal.

What makes a company like Whatsapp so valuable? Whatsapp is a messaging service that allows users to send messages to one another using their smartphone. Unlike SMS, it works over the internet rather than the phone network, so the user needs internet access on the phone. The big benefit of Whatsapp over SMS is the price. Whatsapp charges users 1 dollar per year, effectively charging nothing to send messages. Whatsapp also allows users to send text messages internationally without extra charges. Sending an SMS to a different country is prohibitively expensive, and now Whatsapp can do this for you at no cost.

Whatsapp has grown in popularity so much that it will soon overtake SMS globally. The number of Whatsapp messages sent per day is close to the number of SMS messages sent per day around the world, and Whatsapp messages are growing fast. This really is an amazing statistic. A single company's messaging service is going overtake the number of SMS messages sent globally by every user in every country.

This is the reason Facebook has paid so much money for Whatsapp. It is the potential that this will become the new standard for messages between mobiles. Despite this, it is very difficult to understand where the 19 billion USD comes from. When valuing a company like Whatsapp, it is difficult to forecast future cash flows with any degree of accuracy.

The approach of many technology companies is to make a great product that reaches the biggest audience possible. Then afterwards figure out how to make money from that. Companies like Facebook, Google, and YouTube all started out without making any money. After they reached a certain size, they then focused their efforts on generating revenues.

Facebook is following this approach with Whatsapp. Whatsapp is a growing company that reaches a very large number of users around the world. And Facebook will at some point figure out how to make money from this.

We are asking the question on the Equitymaster club forum: Do you think Facebook overpaid for Whatsapp? We encourage you to please post your views.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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20 Responses to "What is Facebook Thinking?"

Chandni

Mar 5, 2014

The entire deal looks like a bubble game giving me a resemblance of Lehman Brothers.

Unable to understand how facebook is going to generate revenue

Like 

AP

Mar 4, 2014

Friends,
The item which is sought in this deal is the access to the communications, chats & personal data of 350 million users on the Whats App network.

As per What's App, they do not archive any user data or communication. This situation might not remain after the takeover by Facebook who as we all know archives all user information on their servers.

I would not be surprised if this acquisition is funded by the US Govt who has become paranoid and hungry for such information. It is commonly known that the development programs of a number of firms in the US, are sponsored by the US government in exchange of the rights to spy on their customers /users.

Like 

Seshagiri Babu

Mar 3, 2014

I would argue this is a very smart investment. If they charge $1 per yr per SMS, we can sort of compute their cash flows merely on the basis of estimated smartphone consumers.
- 1.75 B smart phone users in the world.
- Take an approx. 40% (this is a complete guess, it could be less or more) of them being Whatsapp subscribers with a growth rate of 15% per annum for first 5 years and 10% thereafter.
- Using 4% for Discounted Cash Flow analysis, the $19B can be recovered in 13 years!!!

But this is not what FB bought the company for. I reckon it is for the subscriber base, for innovation in what could be done for monetization of this subscriber base, information control if and when it becomes the de-facto standard for texting and possibility of business use when they can monetize the service for way more than $1 per annum.

Like 

PMLRao

Mar 2, 2014

Considering the facility offered by whatsap it looks overprized to a non technical person like me. Other apps like Wechat is catching up.. There could be other companies coming with value additions than Whatsap. Future only will tell the real thing.keep guessing!!

Like 

sudhir jain

Mar 2, 2014

Looks like either very wrong assessment or billions have been paid instead of millions. Remained of dot.com bust periid and subprime game.could there is something which we are are not able to fathom right now. Let us wait and see. So many acquisitions earlier has also been proved wrong, and simply this one could be one more

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VIVEK GOYAL

Mar 2, 2014

Overpaid. Facebook made a mistake.

Like 

Rajesh Garg

Mar 2, 2014

Well let me know how many whatsapp users in world?
I think 1USD per annum is a very nominal and affordable charges to use this app even in india every whatsapp user can pay as this app is very smooth n user friendly so I think that fb has taken step very wisely and you'll see now a great increase in fb revenue soon.....

Like 

Chetan

Mar 2, 2014

There is nothing as good deal or bad deal, until and unless we end users make this happen.....Why did Facebook bought Watsup and not LINE, Tango or Wechat.....like applications.....as of now, we can say it a Gamble, Facebook has used public money which was raised out of its recent IPO. Truly it can be a bubble but ultimately we end users will be enjoying.....bcoz if watsup becomes chargeable.....I hope there will better applications available for ones who are used to use FREE services :-)

We and are tech team building such platform, cloud based....which will be free for user and chargeable for advertisers........same as BBM.....will keep updating on this :-)

Like 

Sri

Mar 2, 2014

The real question here is whether the existing WhatsApp userbase will remain, decrease or increase? Why? Facebook has been facing stiff resistance from users on privacy issues. The huge and increasing popularity of WhatsApp is because of the privacy available and it being ad-free and having no piggyback apps like games. Will Facebook retain that? Although they assure that WhatsApp will continue to be an independent unit, will the WhatsApp users trust the same product under the Facebook umbrella? I would not! Then, what about the telcos? Will they just sit around while their business gets snatched away? Wouldn't they try to squeeze the transmission media? There are increasing concerns in the US about the recent merger efforts of 2 big telcos and how it would increase the internet (transmission media) cost via the monopoly route. And of course, there's always the chance that someone else will come up with a better product with more features. WeChat, SnapChat etc. come to mind.

Like 

Steven

Mar 2, 2014

Asking opinions from simple people who don't know how to manage their
Own finance cash flows is funny. Simple people includes me also. Ha ha

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