In the last few days the acquisition of WhatsApp for a stunning sum of $19b was the most popular discussion topic in the tech business community.
The reaction to the acquisition cost ranged from criticism (like this Tumblr post suggesting that Iceland may be cheaper, at $14b) to thoughtful analysis of the economic value of WhatApp’s 450 million users (like this CNN Money article) or its SMS volume.
I believe most critics and analysts are missing the point.
Any attempt to come up with a fair value of WhatsApp is inherently flawed.
Would you be willing to pay 10% of your wealth for a gallon of water? Certainly not if you are sitting in your house or office and reading this blog post. But if you were in a desert and just ran out of your last bottle, I bet you wouldn’t hesitate.
Would you be willing to pay 10% of your wealth for vaccination for life-threatening disease X? Certainly not if you had no reason to believe you would ever get disease X. But if you had a reason to suspect there’s high likelihood of getting this disease, I bet you would seriously consider paying more than 10% of your wealth for the vaccination.
For obvious reasons, most people would agree to part ways with a big part of their wealth in life threatening situations.
So do companies. Or, so they should.
Here is Nokia’s market cap chart from 2007 through 2013.
Knowing what you know now, if you were Nokia’s CEO, how much would you have been willing to pay in 2007 to get access to the smartphone market?
The reality is that despite its simplicity, WhatsApp is disruptive to the maket. It is rapidly taking over as the preferred communication method with friends. Many people are now subscribed to multiple WhatsApp groups, and when they have something to say, news to announce or a point to make, they pick up their smartphone and post it to their WhatsApp groups. What used to be Facebook posts (back at home) are increasingly becoming WhatsApp messages (on transit). What used to be short phone calls are increasingly becoming WhatsApp messages as well.
Could WhatsApp ever have displaced Facebook as the world’s most dominant network of people? Hard to tell. Would WhatsApp users be interested in “profile pages”? Would they use a web interface to write longer posts to their WhatsApp friends? I don’t know. But my guess is that Facebook didn’t want to wait and find out.
So, in my mind, the WhatsApp acquisition is first of all a survival act—a very expensive insurance policy. Is $19b too much for such insurance? Again, hard to tell. In retrospect, I’m sure Nokia would have been eager to pay $19b in 2007 to get access to the smartphone market, when Apple launched their first iPhone.
In this case, we will probably never know whether Facebook’s defensive move saved it from becoming the next Nokia or whether the insurance money was spent towards an event that would never happen. But, as things turn out, the investment amount was around 10% of Facebook’s value, and Facebook is now one strategic threat down.
Update: just bumped into this article, with rumors around Google’s attempt to outbid Facebook.