
Numbers That Explain Why Facebook Acquired WhatsApp - benworthen
http://sequoiacapital.tumblr.com/post/77211282835/four-numbers-that-explain-why-facebook-acquired
======
Irishsteve
America Online President and Chief Operating Officer Bob Pittman said:
"Acquiring ICQ fits perfectly into our multiple-brand strategy. Like
CompuServe, ICQ substantially broadens our reach in important markets not
served by AOL-branded products. In addition to its international reach, ICQ
has tremendous appeal among young, technically sophisticated Web users and
there is remarkably little overlap with AOL."

~~~
gknoy
... shortly before they shuttered the ICQ service and merged it with AIM.

~~~
abraham
ICQ is still around.

[http://www.icq.com/en](http://www.icq.com/en)

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habosa
So I understand the value of WhatsApp now that the network is absolutely
enormous, but can anyone shed some light on how WhatsApp differentiated itself
at first?

It seems like it's just basic user-to-user messaging over data, with a list-
like interface that looks like every messaging app on my phone. How did they
convince people that this particular proprietary solution was the best? Did
they somehow remove friction in getting your friends to join? I feel like
using Google Hangouts or any other proprietary messaging service is the
same... I must be missing something.

~~~
adventured
I'm trying to find an explanation for how WhatsApp's network is supposedly
worth drastically more than Gmail / Yahoo / Hotmail webmail is. Just because
users connect, doesn't mean you have a pot of gold. I believe this is a
critical, flawed assumption that is being nearly universally made. Last
generation's instant messaging apps were nearly worthless monetarily, and are
still nearly worthless even today with tons of users. Why the assumption that
today's mobile versions of instant messaging will be worth ... over a hundred
billion dollars (apparently)?

I've got an alternate theory. Today's WhatsApps and Snapchats will turn out to
be terrible businesses, that aren't worth anywhere near what's being
speculated. Today's user (mobile based) obsession will be viewed as not all
that different from yesterday's eyeballs (web based) obsession. What are the
consequences of that scenario?

~~~
tim333
People do pay for WhatsApp - the article says $1/yr although I think I paid
69p for life (approx $1) for the iphone app. If they get 1bn people paying $1
then that's a decent income. I was reluctant to pay - I'm tight like that -
but I had to because my friends were on it and wanted to communicate. Though I
note people are moving to Viber to some extent which is similar but free.

~~~
cowls
1bn people * $1 is a decent income? Bearing in mind that is an optimistic
figure and FB paid 16 times that...

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kumarski
Just for good measure................

Activison-Blizzard – $13.9B

Alcoa – $12.2B

American Airlines – $12.3B

Akamai – $10.9B

AmerisourceBergen – $15.9

Blackstone Group – $17.8B

Campbell Soup – $13.6

Chesapeake Energy – $17.2B

Chipotle – $17.1B

Citrix Systems – $10.7B

Coach – $13.5B

Consolidated Edison (ConEd) – $16.2B

Discovery Communicatons – $19.1B

Dr. Pepper Snapple Group – $10.2B

Expedia -$10.2B

The Gap – $19B

Fidelity – $15.8B

Harley-Davidson – $14.1B

Hertz – $11.5B

Icahn Enterprises -$13.1B

The J.M. Smucker Company – $10B

Kohl’s – $11.1B

Kroger – $19.4

Loews – $17B

Macy’s – $19.6B

Marriott International – $15.4B

Mattel – $12B

MGM Resorts – $12.7

Monster Beverage – $12B

Moody’s – $17.08B

News Corp – $10.27B

Nielsen – $17.6B

Nordstrom – $11.4B

Progressive – $14.3B

Ralph Lauren – $14.2B

Red Hat – $11.1B

Royal Caribbean Cruises – $11.4B

Ryanair – $15.5B

Sherwin-Williams – $19.4B

Southwest Airlines – $14.7B

Starwood Hotels & Resorts – $14.9B

Symantec – $14.4B

TD Ameritrade – $18.4B

The Carlyle Group – $11.1B

Tiffany & Co. – $11.4B

Tyson Foods – $13.1B

Under Armour – $11.4B

Whole Foods Market – $19.3B

Workday – $17B

Xerox – $13.2B

~~~
mynameishere
That list is restricted to companies at a similar capitalization to
"WhatsApp". In contrast, Ford Motor Company is valued at 60 billion (about 3-4
times more than "WhatsApp"). I would suggest quite plainly that the trademark
"Ford Motor Company" alone is worth more than the every part of the "WhatsApp"
enterprise combined, including whatever technology they may have created, if
any.

Obviously the investment banking refugees working at Facebook aren't stupid,
and I suspect they're going for the big kill, with other people's money as
usual. Maybe "WhatsApp" will be the next big thing. Who cares? If I was
writing a check out for 16 billion, it sure wouldn't be for the stupidest
thing I've ever heard of.

But...not my money.

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jackgavigan
The nmbers are actually irrelevant. The key thing is that Whatsapp has the
potential to become a rival to Facebook (or be acquired by some company that
seeks to compete with Facebook).

Facebook needs to avoid that at all costs, so is prepared to pay whatever it
takes to acquire potential rivals, thus removing the threat.

See
[https://news.ycombinator.com/item?id=7267516](https://news.ycombinator.com/item?id=7267516)

~~~
naterator
You know, since I heard the news I kept hearing people make that argument and
I thought, "But Whatsapp and Facebook are completely different products and
markets." ... And then I realized that the only thing I use Facebook for is
keeping in touch with people. And Whatsapp could easily fill in for 80% of
what I do on Facebook. Indeed, they are trying to neutralize competition.

Sadly, I remember the days of Microsoft's near-monopoly on desktop computing,
and I'll be getting rid of whatsapp within the week. On to Telegram or whoever
is willing to make an identical app that isn't owned by FB or Google or
whoever. The question will be whether I can convince others to switch.

~~~
edwintorok
It surprises me that there people still using WhatsApp given its bad security,
and having to pay for it after a year? What keeps people from switching to
other alternatives? Doesn't Telegram/Textsecure etc. offer the same, while
being completely free?

But I guess Facebook acquiring them explains it: I don't use Facebook either,
so now I'm even less inclined to use WhatsApp.

------
revelation
4\. The number of times WhatsApp has through unprecedented incompetence
compromised the privacy and security of its users and failed to keep even
basic authenticity guarantees in what is a decades old central server model.

Why muck around, they were bought because of their massive user base and user
base only. They succeeded regardless of their constant attempts at sabotaging
their success, and its testament of massive market failure. We need to abolish
the closed gardens to ensure inertia doesn't stop bad products from failing.

~~~
interstitial
The twitter business model never fails.

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brownbat
I'm astounded at how frequently people are apparently making breakthroughs in
sending raw text between people.

I keep thinking that's a mousetrap, and people somehow keep making money off
of* better ones.

Shows how much I know.

* Or at least building huge userbases on...

~~~
s_kilk
It's never really about the raw text itself, but the context. Facebook,
Whatsapp, Forums, Twitter, SMS, Etc... are all just text but in radically
different contexts. Something tells me we haven't seen the last of the
innovations in good ol' plain-text.

~~~
kybernetikos
I really don't think plain text communication has innovated much since email
and IRC.

The money is mainly about users. Facebook are buying users, not technology.

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rwissmann
Facebook is running 2b+ in Ad profits at an 8x YoY growth. If owning social
networking and communication stays this profitable and Whatsapp helps solidify
Facebook's dominance, the purchase is entirely justified. Remember, Whatsapp
basically killed SMS outside the US.

We always scold people and companies for not taking huge bets once they become
successful. Huge props to Zuckerberg for staying hungry and willing to take
risks.

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umeshunni
They charge $1/year with the first year free. Last year they had ~250M users
and today they have 450M. So, about 50% (or 40% or 20%) of their user base is
paying $1/year. So, their annual revenue is $90M - $225M depending on the
assumption. Even with a $1M/employee burn rate, their op ex is <$50M. Hence,
they were profitable.

Another data point on their finances - The only external funding they've taken
is $8M from Sequoia in 2011. It's unlikely that that could last them till now
with 32 employees.

~~~
quaunaut
Profitable sure, but I'm curious what their plans for expansion on that profit
is. At best right now, they can hope for $450m next year. Even if they got all
of that, it'd take more than 30 years to make Facebook their money back.

So there's something they're wanting to do, a means of making money, that we
don't know yet. I'm genuinely curious what they're thinking about.

~~~
eru
They could just over more `premium' services for more than 1$ per year.

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ardacinar
I think the most important of those numbers is the last one, 0 marketing/pr
budget. I've seen ads for viber and line on tv/newspapers etc. and the ads
immediately discredited those services for me, as in, if they had enough cash
to broadcast TV ads in Turkey(I live there), they were probably handing my
data over to anyone for cash, probably (and quite a few of my friends thought
similarly). So, for such a service, having no ads/pr might actually be more
beneficial.

~~~
amirmc
> _"...they were probably handing my data over to anyone for cash..."_

How ironic.

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zt
Let's assume that Sequia owned 25% of WhatsApp for their $8M investment. That
means that they turned $8M in to $4,000M in three years.

~~~
dm8
This investment must've returned their entire fund

~~~
myzerox
Twice.

It's a $1.3B fund.

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panarky
From WSJ liveblog of the FB-WA conf call:

    
    
      “Monetization is not going to be a priority for us,” Koum says.
      “We’re focused on the growth.” He says he’s looking ahead 10-15 years.
    

[http://blogs.wsj.com/moneybeat/2014/02/19/live-blog-the-
face...](http://blogs.wsj.com/moneybeat/2014/02/19/live-blog-the-
facebookwhatsapp-conference-call/?mod=e2tw)

~~~
pi-err
Good link.

> "Mr. Zuckerberg says the deal fits into Facebook’s journey to become a
> mobile company."

Can you morph from desktop to mobile? Who succeeded in this? I wonder what's
the price tag on previous pivots to mobile.

Apple - mostly organic, mini acquisitions. Possibly $3-5b for iDevices
development?

Google - half organic with some big (failed) acquisitions (Moto). Possibly
$10b net

MS - mostly acquisitions. Possibly $15b including Nokia.

FB - mostly acquisitions. Total "journey" cost so far: ~$20b

This certainly feels like FB is walking in MS steps.

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josephjrobison
From 5 minutes of reading it seems that it's huge in overseas markets where
people want to avoid the cost per SMS message fee, am I correct?

If you have a standard plan with the phone giants in the US, all calls and
texts are generally unlimited, but you pay for data now. Is that why it's not
as big in the US?

~~~
rwissmann
Not that alone. Here in the UK SMS is often unlimited. People still prefer to
use Whatsapp. I and most of my friends have virtually stopped using SMS.

Another advantage are international SMS. Again more relevant for say Europeans
than for Americans.

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d23
I guess I still don't get it. I can send images and group chat via SMS. Does
this really do anything any different? I'm not asking just to be contrarian --
I'm just wondering if I should try it out and try to convince my friends to do
the same.

~~~
ma2rten
\- Unlimited SMS plans are less common than unlimited data plans in Europe.

\- You can not do group chat via SMS. You send a SMS to multiple people, but
they will only see your number and can't reply to the group (unless I am
missing something). I feels more like chat room for your friend group or
family.

\- In Europe mobile phone providers have historically tried to rip off people
with MMS, which may be a reason why they are unpopular.

~~~
exhilaration
Both the iPhone and recent Android phones support group SMS. The package is
actually sent as an MMS containing the message and list of recipients, that
allows you to "reply to all" via SMS.

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kosei
450\. I can't believe they spent 16 billion dollars for just 450 million
active users. That's $35 per user.

32\. Well, they can't be acquiring the talent, because no matter how good they
are, it's crazy to spend $500,000,000 per employee.

1\. Speaks to the potential risk that it'll be to monetize this base and
change the business strategy considering it's built on the idea of no ads and
a low charge.

0\. Fair enough, they created a massively successful product without any
marketing. That said, not exactly sure how it translates to future
profitability.

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jgalt212
Tragedy of the commons.

Anything free will be overused. FB is paying $X per user for an overused
product. Once they try to monetize (ads, higher fees, user tracking), it will
quickly become underused.

~~~
nemothekid
Just like how they killed the Instagram goose right?

~~~
jgalt212
very different products: Instagram users, for the most part, want others to
see their pictures. WhatsApp users, for the most part, don't want others to
read their SMS messages.

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ulfw
Those numbers don't explain why FB bought them. They don't really explain
paying $19,000,000,000 at all.

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locusm
My experience when I first used WhatsApp on a droid phone was... * Absolute
piece of cake to get started/configured * Absolute piece of cake to message
friends * No 22c charge from carrier per SMS

Pretty good recipe for success.

~~~
RandallBrown
Are you outside the US?

I haven't paid 22 cents for a text message in YEARS.

~~~
pyre
Presumably you're paying a flat-fee that's more than $1/year though.

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josefresco
Love how the article repeats how much the founders hate advertising yet their
new owners are purely in the advertising market. I guess when someone backs up
a truck load of cash your principles go flying out the window. How long until
daddy Facebook starts asking for WhatsApp for more revenue via ... ads? I
guess that would be around the time the founders cash out and start looking at
their next startup.

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hoi
It's not just a numbers game.. I write this analysis a few day ago before the
viber and this acquisition. [http://www.hoista.net/post/76404923258/the-rise-
of-trojan-ho...](http://www.hoista.net/post/76404923258/the-rise-of-trojan-
horse-platforms-kakaotalk-wechat)

~~~
bitcuration
Yep, what has happened in Asia alarmed Facebook and jack up this deal's price,
pretty obviously. What weechat and line have achieved can be easily perceived
on whatsup, that scared Facebook.

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allochthon
Am I the only one that gets a nervous feeling about Sequoia boosting WhatsApp
like this after Facebook's announcement of a 16B acquisition? I'd call it
suspicion of a conflict of interest, but I don't think that description quite
fits in this instance.

~~~
mcintyre1994
Sequioia was Whatsapp's lone investor, this is an insane deal for them.

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vayarajesh
If facebook promised to let whatsApp stay as an independent product and not
pollute it with ads then why did facebook purchase it in the first place. They
are not going to integrate whatsApp as a part of facebook messenger. They
might make something else something all together but still a costly price to
pay whatsApp to make whatsApp what its already doing. (could be a different
reason to take out competition, either way a pretty expensive agreement.)

One thing is sure, any app which connects a billion users, facebook will go
after it.

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yanivs
Whatsapp is great and the numbers speak for themselves, but I think that
promoting the $0 marketing spend brings a wrong notion to consumer facing
startups. Usually it's ok to spend here and there to get your initial user
base or to learn about your product/market fit. Otherwise you're just relying
on blind luck.

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lettergram
Seems to me Facebook just obtained another few hundred million not using their
messaging services data...

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ulfw
How much did they pay for Beluga in 2011 (which then became Facebook Messenger
- an app that does pretty much the same as Whatsapp, if not more)? How little
(if anything) did they spend in Marketing that app since? Sounds like a costly
mistake.

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stackcollision
"It’s a decidedly contrarian approach shaped by Jan’s experience growing up in
a communist country with a secret police. Jan’s childhood made him appreciate
communication that was not bugged or taped."

How ironic that they sold to Facebook.

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AJ007
Presumably the published purchase price is based off what Facebook's stock is
currently trading at today? Assuming a correction back down toward the $100
billion range, the acquisition price doesn't seem so wild.

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rdnpwr
I think the main reason is users in non-develiped countries and remote niches
that dont really use FB.

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gesman
"After one year of free use, the service costs $1 per year"

With 200M users a year ago - it makes a sense.

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henrikm85
I can hardly read that grey used on sequoia's blog. Just sayin'...

