Monday, March 3, 2014

WhatsApp, Revisited

While researching for my blog entry about the Facebook purchase of WhatsApp, I wanted to get the opinion of someone who has industry experience in this sort of thing.  So I reached out to my good friend and former colleague Mark Pilipczuk who is a marketing veteran with 25 years of experience and a former SVP at AOL.  My question to him was simple:  did the purchase make sense when taking the cost into consideration.  His answer is below.

"I haven't spent any real time thinking about whether the $19B was a good/bad/indifferent deal.  What I have been thinking about is the YouTube acquisition by Google a few years back. Many thought the purchase for $1.65B in stock was excessive, particularly for a startup that had no real revenue model and had some serious potential copyright issues. In fact certain three letter ISPs looked at YouTube a couple of times prior to that and couldn't make the math work for an acquisition.

What Google was betting on--it turned out correctly--was the explosion of interest in the sharing and mashing up of video content. Google wasn't paying for a certain number of MAUs
(Monthly Active Users. -Larry) or how that rate of increase might continue or accelerate. Instead, they were betting that the number of minutes of video uploaded was going to explode and that the consumption of those minutes would also explode, shifting attention (and therefore media dollars) away from TV to online.

I believe Facebook's purchase of WhatsApp makes sense in general for the following reasons:

  • Facebook "and..." Facebook is no longer the "one-stop-shop" for social networking. It's also not dying among teens, regardless of what you might see in the headlines. Rather people are tending to use multiple networks and applications, depending on their needs. The basic one is Facebook supplemented by something like Instagram, Snapchat, Vine, etc.
  • Social networking moves to mobile. With the greater capabilities of mobile phones, it's easier and more convenient to do almost everything from our phones. There's no need to go back to the desktop to accomplish too much creation and all the consumption can be done from the handset.
  • All time spent online moving to mobile. It's not just social networking moving online. It's all time online moving to mobile.
If you're Facebook, you'd like that second/third app to be in your family of brands. Even if you don't monetize WhatsApp and put ads on those screens, you can certainly use the data to monetize Facebook. Getting access to that transactional and behavioral data is a good thing as it keeps it in-house and eliminates the need to license the data separately.

I think of the acquisition in terms of getting access to lots of data and gaining share of handset, particularly among the 2nd/3rd app being used for social networking. With the acquisition, the Facebook social graph on users gets more robust.

I think we'll continue to see Facebook acquire fast-growing apps, even if they don't have revenue models for the foreseeable future.

Now is $19 billion a good price? Absolutely no idea and I honestly don't believe anybody who's trying to model it out has a clue. If you're trying to value it on a per-user basis, which implies that the acquisition has some expected break-even, you're missing an important thing. Facebook, much like Google, isn't beholden to Wall Street. Zuckerberg and other insiders have control of the company's voting shares. They are already fabulously wealthy and can afford to play the long game, much like Brin and Page at Google. They don't have to justify the purchase price to anybody else and, if other shareholders don't like it, there's nothing they can do except sell the stock.

I think that for sure we'll look back and think tactically this was a good purchase. We may have a different opinion on the price, but I think that like the YouTube purchase, it'll be a few years before the jury returns.

Thanks for the amazing insight, Mark.

1 comment:

  1. Great analogy to YouTube Mark and a good reminder. I thought the WhatsApp acquisition was a ridiculous overpay, but after reading this insightful post I'm not so sure. Clearly mobile is an important play and if they had money (stock) to invest, that's the place to do it.