WhatsApp, $19 Billion, and the Unreal Economy of Silicon Valley

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what you built is interesting to Facebook or Google (preferably both at once), or valuations in the $10 billion to $20 billion range would be inconceivable.

That’s why I’d say the WhatsApp acquisition is an anomaly, rather than a case of venture-backed innovation firing on all cylinders. Sure, Koum and Acton are now billionaires, and Sequoia Capital’s ownership stake in WhatsApp, reported to be around 15 percent, means it’s in line for a $3.5 billion windfall, or about 60 times its investment. But as a couple of recent profiles of WhatsApp make clear, it’s all an instance of absurdly good luck. Koum and Acton didn’t originally set out to build a Wi-Fi-based instant messaging app, and their service only evolved in that direction after Apple changed its policy on push notifications in iOS in 2009 (giving developers the ability to make an alert pop up on users’ screens in response to events such as incoming messages).

You can’t arrange those sorts of accidents, which is why it would be so risky for other entrepreneurs to try to follow in WhatsApp’s footsteps. As a Bay Area-based technology reporter, I remember seeing the stars in startup founders’ eyes when Instagram fetched $1 billion, just two years after its creation. But the only other company to bear out those dreams so far is WhatsApp itself. I’m afraid that this latest acquisition will up the ante to a level that’s poisonously intoxicating and all but unattainable for other entrepreneurs.

Meanwhile, what does the acquisition mean for WhatsApp and Facebook users, and for technology consumers in general?

Well, in the short term, it means that all the data users trusted to WhatsApp—including everything in their mobile address books—now belongs to Facebook, and will likely be subject to Facebook’s ever-gyrating whims about privacy. In the medium term, it wouldn’t be surprising to see Facebook kill Messenger and replace it with a retooled or rebranded version of WhatsApp, or make new users log into Facebook in order to use WhatsApp.

In the long term, owning a 450-million-strong messaging network means Facebook will be in direct competition with mobile carriers. They’d probably like to hold on to their SMS businesses, but will find that more and more users are opting for app-based messaging and cutting back on their add-on services, the same way cord-cutters are dumping paid TV programming in favor of cable as a dumb pipe. I suppose that kind of competition could be good for mobile subscribers.

But it doesn’t mean that we should expect stunning new gains in the convenience or affordability of telecommunications. After all, as my friend Stever Robbins, a Boston-based executive coach, points out, instant messaging is 40-year-old technology—it only seems newer because startups like WhatsApp keep coming up with different ways to package it. “It is [from] our parents’ generation, and we hate to admit our parents did anything good, so if we reinvent it enough times on enough different platforms, that’s innovative!!” Stever writes, with more than a touch of sarcasm. I get where he’s coming from.

If you’ve gotten this far, you don’t need the TL;DR version of this column, but here it is anyway: $19 billion doesn’t mean much when it’s funny money that only Facebook or Google can afford to pay. It’s dumb to set out to build a company that Facebook or Google might want to buy, since even if you hit on something scalable, you can’t predict exactly what technologies they’ll want or need at the moment your thing scales.

Much better to try something totally new. And the timing for that may actually be good, since it’s clear now that Facebook can only get where it wants to go by acquiring other companies. It’s done innovating on its own, which means there’s room for someone to come along and wipe the game board clean.

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6 responses to “WhatsApp, $19 Billion, and the Unreal Economy of Silicon Valley”

  1. Woo hoo I love when you get fired up about a topic Wade. This analysis is great. Wondering what your POV on the Viber acquisition by Rakuten is now. Maybe $900M was a bargain? Irrelevant?

    • Wade Roush says:

      Thanks Jules. Sure, the price fetched by WhatsApp makes Viber look like a bargain, but only inside this little snow-globe of rival social/media/advertising networks. I didn’t really follow Viber much since it’s out of Israel and Cyprus, and I don’t follow Rakuten since it’s in Japan. (Xconomy is hyperlocal to our nine bureaus, as you know.) From a cost-per-user perspective, Rakuten got a much better deal than Facebook (it paid $9 per user vs. $42 per user for WhatsApp). I have no insight into Viber’s demographics or engagement rates, though, so it’s hard to say. It’s clear that the big players feel they need mobile messaging tools to compete, so I’d expect some kind of move now from Google.

  2. David Hayes says:

    What a great article on silly people doing silly things, if Facebook really had some balls it would use it vast reserves and start something that will employ people or reskill people to have a better life or even help crawl out of poverty. All driven by advertising dollars – their all lunnies.

  3. Ironically, at Mobile World Congress, Zuckerberg asks the operators to offer free data so Facebook can reach the next billion consumers. Well, for $19 billion, Mr. Zuckerberg could offer 15 GB of data per year to 1 billion users for 5 years (assumption: wholesale price of $0.25/GB of data).

  4. adam_hartung says:

    Hi Wade, and great article. I’d like to add that the $19B isn’t really $19B. As you wrote, only $4B is in cash. The rest is FB stock. So, it’s a pile of paper. What’s that paper worth? Well, the sellers can’t sell it. None of it for at least 1 year, and then limited amounts for the next 3 years. What will that stock be worth in 2017? Maybe a lot more, or maybe a lot less.

    When Google bid $10B it was doing the same thing as FB – using stock. But, at Google the company value is 33 times earnings. At FB the company value is 116 times earnings. So Google currency is only worth 1/4 the value of FB currency. Therefore Google couldn’t give as much “google paper” to the WhatsApp founders as FB could give “FB paper.” According to arithmetic the FB bid is larger – but that arithmetic can change remarkably in a few months, all depending on “investor expectations.”

    Your arguments for the business case for FB are well founded. So, before we get too caught up in the price let’s be well aware that in Silicon Valley monopoly you can use your own currency and not be limited to just cash. Price isn’t what it at first looks like.

    You can read more on this – and why it’s smart for a high value company like FB to use its “currency” to make acquisitions – at Forbes.com http://onforb.es/1bIVXRy

    • Wade Roush says:

      Hi Adam. Thanks for your comment. Really great piece over at Forbes. I agree with much of what you say, there and here. But I wear at least three hats so my perspective is somewhat different from yours.

      Part of my job is to cover Facebook and its strategies for growth. I can see the business argument for the WhatsApp acquisition. I think it’s way too early to call it brilliant — the most one can say is that it’s ballsy.

      Another part of my job is to chronicle the overall innovation ecosystem here in the Bay Area. From that perspective, I think the WhatsApp acquisition is an unalloyed disaster. It will skew the expectations of entrepreneurs and investors for years to come, likely leading to massive disappointment among both. I think there used to be an assumption that the “unicorn” companies emerging from the far, narrow end of the venture funnel would be by and large benign; that they’d occasionally provide nice exits for the other companies not destined to grow huge on their own, keeping the whole system humming along. That is no longer the case. Google and Facebook and Apple, and to a lesser extent Microsoft and Amazon and Yahoo and eBay, are now able and willing to throw around so much money that it’s distorting incentives and squashing innovation.

      Finally, I write about the consumer experience of technology (that’s what the Xperience section is all about ). I don’t think it’s clear yet whether the WhatsApp acquisition will lead to greater consumer choice and convenience and lower costs when it comes to communication options. There’s no inherent reason to think that it will. A world in which most communications happens via IP, with Internet companies like Facebook as the gatekeepers, doesn’t sound much more enticing to me than today’s world of carrier oligopolies.