Numbers That Explain Why Facebook Acquired WhatsApp | Hacker News Reader

Numbers That Explain Why Facebook Acquired WhatsApp

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America Online President and Chief Operating Officer Bob Pittman said: "Acquiring ICQ fits perfectly into our multiple-brand strategy. Like CompuServe, ICQ substantially broadens our reach in important markets not served by AOL-branded products. In addition to its international reach, ICQ has tremendous appeal among young, technically sophisticated Web users and there is remarkably little overlap with AOL."

... shortly before they shuttered the ICQ service and merged it with AIM.

ICQ is still around.

http://www.icq.com/en

Cpanel still has a section for ICQ support.

So I understand the value of WhatsApp now that the network is absolutely enormous, but can anyone shed some light on how WhatsApp differentiated itself at first?

It seems like it's just basic user-to-user messaging over data, with a list-like interface that looks like every messaging app on my phone. How did they convince people that this particular proprietary solution was the best? Did they somehow remove friction in getting your friends to join? I feel like using Google Hangouts or any other proprietary messaging service is the same... I must be missing something.

The post mentioned that all WhatsApp's early competitors benefited through advertising, while WhatsApp dedicated to keep the UI clean, and earn revenues by charging users one dollar a year.

No. It's not $1/yr. it's $1. That's it. There is no recurring revenue stream. That's what makes this even more insane.

On Android at least it's $1 per year, I'm looking at the payment page right now that offers 1 year for $1, 3 for $2.67 and 5 for $3.71.

That said, I've been using it for years and have never paid a cent. Each time as the free year has about to run out, they've extended it.

I am not a WhatsApp user but a number of my friends use it. I think what they did well are: (1) You automatically upload your contact list to their servers. If any of friends start to use WhatsApp you will see it on the list (2) Smart phones were gaining adoption in many Asian markets and their value proposition of cheap unlimited messaging plan resonated very well (3) They charged for their product after initial adoption so they don't have to be tied to VC money forever and avoided annoying users with ads.

I'm trying to find an explanation for how WhatsApp's network is supposedly worth drastically more than Gmail / Yahoo / Hotmail webmail is. Just because users connect, doesn't mean you have a pot of gold. I believe this is a critical, flawed assumption that is being nearly universally made. Last generation's instant messaging apps were nearly worthless monetarily, and are still nearly worthless even today with tons of users. Why the assumption that today's mobile versions of instant messaging will be worth ... over a hundred billion dollars (apparently)?

I've got an alternate theory. Today's WhatsApps and Snapchats will turn out to be terrible businesses, that aren't worth anywhere near what's being speculated. Today's user (mobile based) obsession will be viewed as not all that different from yesterday's eyeballs (web based) obsession. What are the consequences of that scenario?

okay look at this way on mobile Facebook is essentially a message app spread across multiple apps...

Any message app that threatens to overtake Facebook is worth that amount to facebook

People do pay for WhatsApp - the article says $1/yr although I think I paid 69p for life (approx $1) for the iphone app. If they get 1bn people paying $1 then that's a decent income. I was reluctant to pay - I'm tight like that - but I had to because my friends were on it and wanted to communicate. Though I note people are moving to Viber to some extent which is similar but free.

1bn people * $1 is a decent income? Bearing in mind that is an optimistic figure and FB paid 16 times that...

Zero signup = zero friction. You install the software, and your contacts who have WhatsApp immediately show up on your WhatsApp contact list.

It was basically a free SMS replacement at first.

Of course that came with a massive security hole, where your "behind the scenes" login password was MD5 of your phone's imei. That, as far as I understand, has changed now.

It's not really zero signup. WhatsApp does have a signup process that requires setting your name and confirming your phone number. An SMS message is involved too, which means that WhatsApp Messenger can only work on mobile devices connected to a mobile network and that can receive SMS messages.

This is the reason for why I stopped using it in favor of Facebook's messenger, because it doesn't work on the desktop or on iPads or other tablets that aren't capable of receiving SMS messages. Coupled with the fact that people can routinely use multiple phone numbers at the same time, or temporary phone numbers while traveling, it makes for a frustrating experience.

Facebook's acquisition makes no sense to me. All of my friends and acquaintances that were using WhatsApp have already switched to Facebook's messenger and/or Hangouts. If I open WhatsApp right now and send a message, it probably won't reach its target - for example WhatsApp is listing my wife as a user, yet she uninstalled it months ago. And I'm as far away from Silicon Valley's echo chamber as it gets.

But whatever, it's their money.

WhatsApp equals Free SMS, plus you can create groups. That is what their value proposition was back then, that is what it is now.

As a daily WhatsApp User myself, here are the reasons why I prefer it over other similar messenger services:

1. It's the facebook of messengers (now it's just facebook...). In most of Europe an Africa there's a 90% chance , that your friend with a smartphone has also WhatsAp installed. Even the older generation (40+) uses it frequently. In Africa, they even have a song about it [1].

2. Cross-Platform: It's available on most common smartphone platforms and looks almost identical across these. There are no hassles of sending stuff (videos, locations) across these platforms. Changing your smartphone is not a problem as long as you keep the same number.

3. It feels snappy: In comparison to iMessage, FB Messenger it's fast and has no disturbing gimmicks. You see messages instantly and it feels like a chat when iMessages feels more like bloated sms...

4. It works in places with unreliable network like rural regions. iMessages fails here often, FB apps also need a stable connection to work properly.

5. A few years ago unlimited text plans were not as common as in the US. Because of this people looked for an alternative to paying ~19c per text (EU). WhatsApp was one of the most polished solutions with a low entry barrier.

[1] http://www.youtube.com/watch?v=zaFkpVrC2sw

> In Africa, they even have a song about it

They also have a song about it in Germany. It's called "Whatsapper": http://youtu.be/Rxb2A4uASqc

I was wondering how they got to your first point.

Any idea why it's more reliable on spotty networks? I'm trying to think of what they could have done to make it better than any other app sending HTTP requests back and forth.

My friends always tell me to use WhatsApp because "it's free SMS". No it isn't! It's just a new ICQ, or whatever.

At first I thought it were a service that integrated with normal SMS, that would communicate via SMS when you had no connection and via data when you had, and the message would always reach the target. That would have been a good app, I think.

Just for good measure................

Activison-Blizzard – $13.9B

Alcoa – $12.2B

American Airlines – $12.3B

Akamai – $10.9B

AmerisourceBergen – $15.9

Blackstone Group – $17.8B

Campbell Soup – $13.6

Chesapeake Energy – $17.2B

Chipotle – $17.1B

Citrix Systems – $10.7B

Coach – $13.5B

Consolidated Edison (ConEd) – $16.2B

Discovery Communicatons – $19.1B

Dr. Pepper Snapple Group – $10.2B

Expedia -$10.2B

The Gap – $19B

Fidelity – $15.8B

Harley-Davidson – $14.1B

Hertz – $11.5B

Icahn Enterprises -$13.1B

The J.M. Smucker Company – $10B

Kohl’s – $11.1B

Kroger – $19.4

Loews – $17B

Macy’s – $19.6B

Marriott International – $15.4B

Mattel – $12B

MGM Resorts – $12.7

Monster Beverage – $12B

Moody’s – $17.08B

News Corp – $10.27B

Nielsen – $17.6B

Nordstrom – $11.4B

Progressive – $14.3B

Ralph Lauren – $14.2B

Red Hat – $11.1B

Royal Caribbean Cruises – $11.4B

Ryanair – $15.5B

Sherwin-Williams – $19.4B

Southwest Airlines – $14.7B

Starwood Hotels & Resorts – $14.9B

Symantec – $14.4B

TD Ameritrade – $18.4B

The Carlyle Group – $11.1B

Tiffany & Co. – $11.4B

Tyson Foods – $13.1B

Under Armour – $11.4B

Whole Foods Market – $19.3B

Workday – $17B

Xerox – $13.2B

Sobering list :)

But FB only paid $4B in cash, the rest is in stock. At a P/E of 111, I'd say FB is grossly overvalued. It's a great thing to swap overvalued pieces of paper for something, just ask AOL, which bought Time-Warner with worthless pieces of paper in 1999. AOL was a modem company in a world beginning to move to broadband. Time-Warner had actual physical cables in the ground and utility-style monopolies in most major cities, along with a bunch of movie/TV IP (if I recall correctly). Unfortunately for Time-Warner shareholders, management apparently assumed that pieces of paper labeled "stock" were equivalent to the limited-edition green and black pieces of paper labeled "$".

I estimate FB paid <= $8.5B. Which is still pretty ridiculous. If I were the WhatsApp founders, I would start selling my FB stock ASAP and buying something with some staying power. Such as perhaps one of the companies on your list :)

That list is restricted to companies at a similar capitalization to "WhatsApp". In contrast, Ford Motor Company is valued at 60 billion (about 3-4 times more than "WhatsApp"). I would suggest quite plainly that the trademark "Ford Motor Company" alone is worth more than the every part of the "WhatsApp" enterprise combined, including whatever technology they may have created, if any.

Obviously the investment banking refugees working at Facebook aren't stupid, and I suspect they're going for the big kill, with other people's money as usual. Maybe "WhatsApp" will be the next big thing. Who cares? If I was writing a check out for 16 billion, it sure wouldn't be for the stupidest thing I've ever heard of.

But...not my money.

I have no idea if WhatsApp made sense financially, but you should be using enterprise values, not market caps because market caps do not consider the debt needed to run those companies.

(EV) Enterprise Value = Debt + Market Cap in Equity

For example, the first company on the list, Activision has an EV of about $22 bn. Nearly double its market cap.

Alcoa is $19bn...

Your point is still really valid, I was just pointing out the difference.

AMD - $2.7B

The nmbers are actually irrelevant. The key thing is that Whatsapp has the potential to become a rival to Facebook (or be acquired by some company that seeks to compete with Facebook).

Facebook needs to avoid that at all costs, so is prepared to pay whatever it takes to acquire potential rivals, thus removing the threat.

See https://news.ycombinator.com/item?id=7267516

You know, since I heard the news I kept hearing people make that argument and I thought, "But Whatsapp and Facebook are completely different products and markets." ... And then I realized that the only thing I use Facebook for is keeping in touch with people. And Whatsapp could easily fill in for 80% of what I do on Facebook. Indeed, they are trying to neutralize competition.

Sadly, I remember the days of Microsoft's near-monopoly on desktop computing, and I'll be getting rid of whatsapp within the week. On to Telegram or whoever is willing to make an identical app that isn't owned by FB or Google or whoever. The question will be whether I can convince others to switch.

i'm not really sure they're the same.

seems to me that whatsapp is more of an active "keeping in touch with friends" where facebook's forte is more of a passive "keeping in touch with friends". that would make them fairly harmonious in my book -- hence the autonomy.

It surprises me that there people still using WhatsApp given its bad security, and having to pay for it after a year? What keeps people from switching to other alternatives? Doesn't Telegram/Textsecure etc. offer the same, while being completely free?

But I guess Facebook acquiring them explains it: I don't use Facebook either, so now I'm even less inclined to use WhatsApp.

How is Whatsapp even remotely the same thing as Facebook? Were SMS ever considered to be a rival to Facebook?

It's not but it could be. All Whatsapp would have to do is expand the functionality of their app to include more social networking features.

Yea and all Ford has to do is put rotisserie grills on their F150s and they could beat McDonalds. Odd argument.

4. The number of times WhatsApp has through unprecedented incompetence compromised the privacy and security of its users and failed to keep even basic authenticity guarantees in what is a decades old central server model.

Why muck around, they were bought because of their massive user base and user base only. They succeeded regardless of their constant attempts at sabotaging their success, and its testament of massive market failure. We need to abolish the closed gardens to ensure inertia doesn't stop bad products from failing.

The twitter business model never fails.

I'm astounded at how frequently people are apparently making breakthroughs in sending raw text between people.

I keep thinking that's a mousetrap, and people somehow keep making money off of* better ones.

Shows how much I know.

* Or at least building huge userbases on...

It's never really about the raw text itself, but the context. Facebook, Whatsapp, Forums, Twitter, SMS, Etc... are all just text but in radically different contexts. Something tells me we haven't seen the last of the innovations in good ol' plain-text.

I really don't think plain text communication has innovated much since email and IRC.

The money is mainly about users. Facebook are buying users, not technology.

Consider that many of their installs come from making pretty much any extant handset in the world (a large fraction thereof, including some very old phones running J2ME midlets) all interoperable across national borders and carrier networks. I don't know of any other way that this has ever been available across a such a range of devices and people. Add to that, zero sign up, account creation, entering server configurations, etc. There was considerable room for improvement on the status quo here, that's what they're built on.

Facebook is running 2b+ in Ad profits at an 8x YoY growth. If owning social networking and communication stays this profitable and Whatsapp helps solidify Facebook's dominance, the purchase is entirely justified. Remember, Whatsapp basically killed SMS outside the US.

We always scold people and companies for not taking huge bets once they become successful. Huge props to Zuckerberg for staying hungry and willing to take risks.

They charge $1/year with the first year free. Last year they had ~250M users and today they have 450M. So, about 50% (or 40% or 20%) of their user base is paying $1/year. So, their annual revenue is $90M - $225M depending on the assumption. Even with a $1M/employee burn rate, their op ex is <$50M. Hence, they were profitable.

Another data point on their finances - The only external funding they've taken is $8M from Sequoia in 2011. It's unlikely that that could last them till now with 32 employees.

Profitable sure, but I'm curious what their plans for expansion on that profit is. At best right now, they can hope for $450m next year. Even if they got all of that, it'd take more than 30 years to make Facebook their money back.

So there's something they're wanting to do, a means of making money, that we don't know yet. I'm genuinely curious what they're thinking about.

They could just over more `premium' services for more than 1$ per year.

I have been using whats app for way more than a year and never had to pay the $1. They would tell you how long you have left but when it was up it would just go on for another year.

I think the most important of those numbers is the last one, 0 marketing/pr budget. I've seen ads for viber and line on tv/newspapers etc. and the ads immediately discredited those services for me, as in, if they had enough cash to broadcast TV ads in Turkey(I live there), they were probably handing my data over to anyone for cash, probably (and quite a few of my friends thought similarly). So, for such a service, having no ads/pr might actually be more beneficial.

> "...they were probably handing my data over to anyone for cash..."

How ironic.

Let's assume that Sequia owned 25% of WhatsApp for their $8M investment. That means that they turned $8M in to $4,000M in three years.

This investment must've returned their entire fund

Twice.

It's a $1.3B fund.

I assume they have to pay taxes over this.

From WSJ liveblog of the FB-WA conf call:

  “Monetization is not going to be a priority for us,” Koum says.
  “We’re focused on the growth.” He says he’s looking ahead 10-15 years.

http://blogs.wsj.com/moneybeat/2014/02/19/live-blog-the-face...

Good link.

> "Mr. Zuckerberg says the deal fits into Facebook’s journey to become a mobile company."

Can you morph from desktop to mobile? Who succeeded in this? I wonder what's the price tag on previous pivots to mobile.

Apple - mostly organic, mini acquisitions. Possibly $3-5b for iDevices development?

Google - half organic with some big (failed) acquisitions (Moto). Possibly $10b net

MS - mostly acquisitions. Possibly $15b including Nokia.

FB - mostly acquisitions. Total "journey" cost so far: ~$20b

This certainly feels like FB is walking in MS steps.

From 5 minutes of reading it seems that it's huge in overseas markets where people want to avoid the cost per SMS message fee, am I correct?

If you have a standard plan with the phone giants in the US, all calls and texts are generally unlimited, but you pay for data now. Is that why it's not as big in the US?

Exactly, Europe is an inverse of the US when it comes to SMS and data prices.

Not that alone. Here in the UK SMS is often unlimited. People still prefer to use Whatsapp. I and most of my friends have virtually stopped using SMS.

Another advantage are international SMS. Again more relevant for say Europeans than for Americans.

Plus: groupchat. And sending images.

Also SMS is effectively broken. SMS was a useful for the non-smart phone crowd. Twitter initially was a way to get global free status updates via SMS. Now it has reversed.

I guess I still don't get it. I can send images and group chat via SMS. Does this really do anything any different? I'm not asking just to be contrarian -- I'm just wondering if I should try it out and try to convince my friends to do the same.

- Unlimited SMS plans are less common than unlimited data plans in Europe.

- You can not do group chat via SMS. You send a SMS to multiple people, but they will only see your number and can't reply to the group (unless I am missing something). I feels more like chat room for your friend group or family.

- In Europe mobile phone providers have historically tried to rip off people with MMS, which may be a reason why they are unpopular.

Both the iPhone and recent Android phones support group SMS. The package is actually sent as an MMS containing the message and list of recipients, that allows you to "reply to all" via SMS.

450. I can't believe they spent 16 billion dollars for just 450 million active users. That's $35 per user.

32. Well, they can't be acquiring the talent, because no matter how good they are, it's crazy to spend $500,000,000 per employee.

1. Speaks to the potential risk that it'll be to monetize this base and change the business strategy considering it's built on the idea of no ads and a low charge.

0. Fair enough, they created a massively successful product without any marketing. That said, not exactly sure how it translates to future profitability.

Tragedy of the commons.

Anything free will be overused. FB is paying $X per user for an overused product. Once they try to monetize (ads, higher fees, user tracking), it will quickly become underused.

Just like how they killed the Instagram goose right?

very different products: Instagram users, for the most part, want others to see their pictures. WhatsApp users, for the most part, don't want others to read their SMS messages.

Those numbers don't explain why FB bought them. They don't really explain paying $19,000,000,000 at all.

My experience when I first used WhatsApp on a droid phone was... * Absolute piece of cake to get started/configured * Absolute piece of cake to message friends * No 22c charge from carrier per SMS

Pretty good recipe for success.

Are you outside the US?

I haven't paid 22 cents for a text message in YEARS.

Presumably you're paying a flat-fee that's more than $1/year though.

Australians get reamed in the proverbial when it comes to carriers and data.

Love how the article repeats how much the founders hate advertising yet their new owners are purely in the advertising market. I guess when someone backs up a truck load of cash your principles go flying out the window. How long until daddy Facebook starts asking for WhatsApp for more revenue via ... ads? I guess that would be around the time the founders cash out and start looking at their next startup.

It's not just a numbers game.. I write this analysis a few day ago before the viber and this acquisition. http://www.hoista.net/post/76404923258/the-rise-of-trojan-ho...

Yep, what has happened in Asia alarmed Facebook and jack up this deal's price, pretty obviously. What weechat and line have achieved can be easily perceived on whatsup, that scared Facebook.

Am I the only one that gets a nervous feeling about Sequoia boosting WhatsApp like this after Facebook's announcement of a 16B acquisition? I'd call it suspicion of a conflict of interest, but I don't think that description quite fits in this instance.

Sequioia was Whatsapp's lone investor, this is an insane deal for them.

If facebook promised to let whatsApp stay as an independent product and not pollute it with ads then why did facebook purchase it in the first place. They are not going to integrate whatsApp as a part of facebook messenger. They might make something else something all together but still a costly price to pay whatsApp to make whatsApp what its already doing. (could be a different reason to take out competition, either way a pretty expensive agreement.)

One thing is sure, any app which connects a billion users, facebook will go after it.

Whatsapp is great and the numbers speak for themselves, but I think that promoting the $0 marketing spend brings a wrong notion to consumer facing startups. Usually it's ok to spend here and there to get your initial user base or to learn about your product/market fit. Otherwise you're just relying on blind luck.

Seems to me Facebook just obtained another few hundred million not using their messaging services data...

How much did they pay for Beluga in 2011 (which then became Facebook Messenger - an app that does pretty much the same as Whatsapp, if not more)? How little (if anything) did they spend in Marketing that app since? Sounds like a costly mistake.

"It’s a decidedly contrarian approach shaped by Jan’s experience growing up in a communist country with a secret police. Jan’s childhood made him appreciate communication that was not bugged or taped."

How ironic that they sold to Facebook.

Presumably the published purchase price is based off what Facebook's stock is currently trading at today? Assuming a correction back down toward the $100 billion range, the acquisition price doesn't seem so wild.

I think the main reason is users in non-develiped countries and remote niches that dont really use FB.

"After one year of free use, the service costs $1 per year"

With 200M users a year ago - it makes a sense.

I can hardly read that grey used on sequoia's blog. Just sayin'...

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