2. WhatsApp's jaw-dropping $19 billion price tag took the world by
surprise. But Facebook might have actually gotten WhatsApp for
cheap.
We're serious. Hear us out.
What is WhatsApp? WhatsApp is a mobile messaging service that
functions as a kind of a social network. WhatsApp users can send
messages to one or many recipients at the same time, and they can
even share their locations.
In many ways, WhatsApp's users are just the kind of customers
Facebook is looking for. They are extremely active, sending more
than 600 million photos a day -- more photos than Facebook (FB,
Fortune 500) users upload. A whopping 70% of WhatsApp users
are active every day. By way of comparison, 62% of Facebook
users are active daily.
People around the world send 19 billion WhatsApp messages per
day, including 200 million voice messages and 100 million videos.
Related: Facebook buys WhatsApp for $19 billion
Crucially, WhatsApp has a strong presence internationally,
particularly in Europe, India and Latin America. Those are regions
where Facebook is trying to grow its base of users. WhatsApp and
other mobile messaging services also are widely used by teens and
tweens, a group that has notoriously been ditching Facebook for
rival services, including text message services and Snapchat.
"Facebook users were complaining dearly about the lack of oneon-one personalized socializing and sharing, which WhatsApp
clearly has been successful with," said Vidya Nath, research
director at Frost & Sullivan.
3. How WhatsApp makes money: WhatsApp is also growing at a
blinding speed, adding 1 million new users per day. At that rate,
WhatsApp should hit 1 billion users sometime next year. With its
$1 annual subscription fee, 1 billion users would translate into
significant revenue for Facebook.
"Large scale networks like WhatsApp are rare and provide
significant monetization opportunity, justifying their valuation
over time," said Robert Peck, analyst at SunTrust Robinson
Humphrey.
The messaging service, founded in 2009, has been so successful
because it understood from the start the importance of embracing
mobile technology. That's something Facebook struggled with,
notably going public without any revenue from mobile devices.
Facebook now gets more than half of its revenue from advertising
on smartphones and tablets, but it still is looking to expand its
mobile reach.
"WhatsApp took chatting to another level, and it further
strengthened the phone as a central point of a consumer's
universe," Nath noted.
As a result WhatsApp managed to attract far more users in its first
four years than its competition was able to over the same time
period.
Growing faster than other social networks: Four years in,
Facebook had just 145 million users. Google's (GOOG, Fortune
500) Gmail had 123 million. Twitter (TWTR) had 54 million. And
Skype -- now owned by Microsoft (MSFT, Fortune 500) -- had 52
million users, according to Heather Bellini, software analyst at
Goldman Sachs.
Although WhatsApp is more limited in its scope and capabilities
4. to Facebook and Twitter, mobile messaging services are becoming
competitors to traditional social networks.
In many ways, Facebook's purchase of WhatsApp mirrors its 2012
Instagram acquisition.
The $1 billion valuation scared some investors at the time, but as
young social network users gravitated towards photo-sharing
services, Facebook wanted to scoop up what could have
eventually become a big rival.
WhatsApp may be "cheaper" than most rivals: Facebook paid just
$30 per Instagram user at the time (the service had 33 million
users when Facebook bought it, compared to 150 million today).
Facebook is spending $42 per WhatsApp user.
But given WhatsApp's enormous user base, its purchase price
might be a bargain compared some of its competitors. LinkedIn's
(LNKD) share price values that professional social network at
$153 per user. Twitter trades at $140 per user, and Facebook is at
$123. Even at its latest $2 billion valuation, Snapchat trades at $50
per user. (And Snapchat reportedly turned down a $3 billion offer
from Facebook last year.)
"We don't think the company overpaid for WhatsApp," said Peck.
"We think WhatsApp and Facebook were likely to more closely
resemble each other over time, potentially creating noteworthy
competition, which can now be avoided."
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