Why WhatsApp Is Worth £11.4bn To Facebook

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steve mccaskill

Facebook’s purchase of WhatsApp protects its mobile business and allows it to expand to new markets, says Steve McCaskill

Shortly after the news broke that Facebook had agreed to purchase WhatsApp in a deal that could be worth as much as $19 billion (£11.4bn), Twitter went into overdrive with lists of companies that the instant messaging app was worth more than.

Sony, Sainsbury’s and ITV were all mentioned, with the general consensus being that Facebook had overpaid significantly and that the technology world was in the midst of another ‘dotcom bubble’, that would inevitably burst in the near future.

But Facebook appears to consider this a price worth paying to expand its reach and ensure that mobile users around the world continue to communicate using networks that it owns.

Around the world

250px-WhatsApp_Messenger_screenshotFacebook currently has more than 1.2 billion users, but precious little room to expand in its current markets and in order to quell fears of saturation, it has spent plenty of time and money trying to reach out to developing countries, where the Internet is accessed primarily on mobile devices.

CEO Mark Zuckerberg has launched Internet.org, which aims to make Internet access cheaper around the world on smartphones and mobiles, while it has also purchased Israeli mobile data compression specialist Onavo.

WhatsApp already has a foothold in many of these markets through carrier deals. The service is popular in the developed world too, with many preferring it to traditional SMS. However this also means users are not using Facebook to send messages, thereby reducing the amount of time they are spending on the social network.

Protectionist move

There are also suggestions that younger users are shunning Facebook entirely in favour of over-the-top mobile applications.

In that sense, purchasing WhatsApp is a protectionist move for Facebook, similar to how it bought Instagram when users were bypassing Facebook to upload photos, and how Google bought YouTube because it was incapable of coming up with a decent video service and didn’t want to redirect users to its rivals in the search results.

But $19 billion is a lot to pay simply to defend your existing business and WhatsApp will need to justify this expense.

WhatsApp’s current revenue model relies on annual subscription fees from users, while its deals with operators are believed to generate in excess of $100 million a year. Co-founder and CEO Jan Koum has gone on the record as saying he was proud of the firm’s anti-advertising policy as phones were personal to people, and that it would be wrong to intrude on people’s conversations.

Such a policy is clearly at odds with Facebook’s current drive to monetise its increasingly mobile user base. Zuckerberg has promised that WhatsApp will remain autonomous, but it would not be in the least bit surprising if adverts eventually appeared in the app, similar to the ones we see on Skype now that it is a Microsoft service.

Facebook recently celebrated its tenth anniversary, but this was greeted with reports questioning its ability to survive another decade. By purchasing one of the biggest perceived threats to its business, it has gained more than a fighting chance.

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