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Business Management

Did Facebook Get a Bargain in WhatsApp?

WhatsApp employees are undoubtedly just discovering the fear and loathing extends well into Silicon Valley as they laugh all the way to California’s banks, Porsche forecourts and bling emporia. But the mother of all internet startup sales also raises the question of what other messaging app companies might be “worth”?

Plenty of pundits have rushed to mock the $19bn valuation of WhatsApp but at least the metrics have some logic. It is lore in valuations that such services have a value that can be measured at $40 per user plus a modest premium. This guide has precedence a long way back: when Microsoft agreed to buy Hotmail way back in 1998 it paid $400m for about nine million freemail users. WhatsApp has 450 million users (multiplying by 40 gives you $18bn) and Mark Zuckerberg is betting his chips that number will grow to a billion.

But while WhatsApp might appear to Western eyes to be the 800-pound gorilla of mobile messaging, it is far from the only animal in the jungle. Indeed, what’s notable is that this is a sector with significant fragmentation, notable in geographic terms. WhatsApp is not all that big (relatively speaking) in the US but it is ginormous in India, for example, and in Europe as a souped-up alternative to SMS.

That begs a question as to what is the valuation of some of the other combatants that are the preferred mode of chatting in other markets. Hard numbers are hard to come by but let’s look at some first-run calculations.

Even without premiums, Tencent-owned WeChat, big in China, has about 300 million subscribers, which would give it a valuation of over $12bn.

NHN’s Kakao Talk, popular in Korea, has about 135 million users, according to some reports, so there’s another $5.4bn.

Line, a name brand in Japan but also big in Thailand and Taiwan, has around about 350 million users so, once again, run the numbers and you get $14bn.

Chinese broker CLSA reportedly suggests that WeChat could command a price of about $35bn and agrees with this writer’s back-of-a-cigarette pack calculation of $14bn for Line.

Now, clearly there should be more to a valuation than a blunt metric such as 40-bucks-per-body-attached and the formula isn’t always used: 10 days ago Japan’s Rakuten paid “just” $900m for Viber’s 225 million users, according to reports. But, as CLSA’s valuation of WeChat suggests, by some thinking there could be even bigger valuations for some of these companies because they have additional services, desirable regional presences and, perhaps, more legs for growth.

Also, remember that Facebook’s purchase is at least partly defensive. The company is adding a service to protect the tides of cash its core business generates, so, a bit like Liverpool FC buying Andy Carroll while the money from the Fernando Torres sale to Chelsea burned a hole in its pocket, it can manage to pay a toppy rate and live to fight another day even if its investment turns out to be a dud. Other internet giants and telcos are in the same boat: they’re desperate to defend what they’ve got and expand on top.

Also, the growth rates are stratospheric so buyers are anticipating a future where a third, a half, a large majority of us all run these apps. That’s a market of billions of people and the successful companies that can build those audiences will very likely be valued at vast sums. Like Facebook, Google or others in the past, what once seemed laughably high valuations may later look like modest, smart outlays.

It’s a race and it’s global, and there’s a lot of money attached to the outcome — the message is out there.

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Martin Veitch

Martin Veitch is Contributing Editor for IDG Connect

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