America Online to Buy Internet Chat Service for $287 Million (1998)
nytimes.com
nytimes.com
http://www.theguardian.com/technology/2013/aug/30/skype-micr...
The bullet point that stands out for me is this:
• Problems monetising it: revenues at the time – $860m for the year, losses of $7m – amounted to just $1.30 per user per year
So, here we have a company, at acquisition, that was making close to the $1 per year per user that WhatsApp is charging. At the end of 2010 skype had 663 million users and was acquired for $8.5 billion. That's $12.82 a user.
Then, as now with WhatsApp, people are questioning whether Microsoft would ever make enough money to justify such a price. Then, as now, people justified the price based on the sort of intangibles (getting rid of a competitor, strengthening the brand, tapping new markets, etc.) the WhatsApp acquisition is being justified with now.
But there is still the big difference that Facebook, with a business in a similar space (obviously still different but they both are chat/communication based), with a similar revenue model per user per year, but only 3 years later purchased it for $42.22 per user. That's almost 4x the price for a similar acquisition 3 years apart.
And people thought Microsoft was crazy for the price they paid for Skype ... it kind of makes you wonder what the hell is going on.
http://cdn-static.zdnet.com/i/r/story/70/00/026526/screen-sh...
I would also argue that being installed and used on mobile devices is more valuable than being installed on a desktop is.
That's 33 times earnings, and Google isn't growing at 70% a year.
400 million users * $1/year = $400m/year, but WhatsApp's expenses look pretty low. Say earnings of 200m/year
$200m * 33 = ~$6B.
That 70% growth rate makes all the difference.
WhatsApp has staggering growth on the basis you don't have to pay for it and its founders are hostile towards advertising, neither of which lend you towards thinking it'll ever reach the 33x P/E ratio (actual P/E ratio >800) still less be significant in 33 years time.
Not sure where to start. What you say isn't even wrong, exactly.
1) You seem to think that the price/earnings ratio has something to do with how the company will do in (P/E) years. It doesn't. As a specific example, companies that are takeover targets have higher PE ratios than they would otherwise, even though they probably won't exist soon.
2) Generally companies with high growth trade at high PE ratios. That's why Google has such a high ratio (it's unclear if you understand this). WhatsApp has even higher growth. AFAIK WhatsApp's revenue is not publicly known, and I'm estimating it at $200m for next year[1].
3) Where are you getting "actual P/E ratio >800"? You know WhatsApp's revenue?
Edit: I see WhatsApp revenue was $20M last year[2]. With growth rates like they are seeing I don't think this says much other than that the revenue model works.
[1] Forbes estimates it at $400M, so I'm being conservative: http://www.forbes.com/sites/hollymagister/2014/02/21/whatsap...
[2] http://www.forbes.com/sites/parmyolson/2014/02/19/exclusive-...
According to http://www.statisticbrain.com/skype-statistics/, only 31 million Skype users are active as of 2012.
FWIW, I don't know anyone (across 5 countries of friends and business partners) who doesn't use Skype.
Still, wouldn't that amount to more than 30M users?
WhatsApp seems to run lean and mean, and that makes a big difference in terms of keeping it profitable.
So that's a revenue that, today, is probably a sizeable fraction of $400m/year. All that with a few dozen employees.
Sales, marketing, accounting, legal, and financial controllership are going to skyrocket when this company has a revenue stream that is worth NPV=$19B.
This is a credit to the company; who like instagram was able to build much value with few FTE's. But building a company "worth money" and building a company "making money" are really different things.
This is smart from a founder's perspective, because in a sense all of those other employees would just be dilutive of attention and likely equity. But from an economic perspective, it's jumping the gun a bit to conclude what the steady state economics will be.
1. It's a single-purpose, specialised application which makes it hard to compete against. Once you can't subtract anymore from a software you are left with the essence of it. If you build that rock-solid you can eliminate any competitive threat on the product front. Kind of like unix utilities.
2. On the network front they played smartly by going after your phone book which makes them network agnostic (Skype, FB, Google, iMessage, BBM are all stuck within their own walls). At this point WhatsApp can just sit back and let network-effects do the work (they have spent 0 on marketing to date).
Between 1 & 2, competing with WhatsApp is hard and they are resilient to disruption. That's a great relief for any tech acquisition.
Another thing I like about WhatsApp is that they didn't do a whole lot other than fixing SMS. They did this by adding group messaging and reducing costs. And for now at least, I don't get any marketing spam on WhatsApp like I do over SMS.
Skype's shelf life was always questionable to me. It was and will remain relatively easier to disrupt.
Well the kid chat rooms were moderated and our entire AOL account was disabled. My mom had to call to have it re-enabled and of course they told her what I had said.
Fun times...
By 2000 you probably missed the volunteers, but still interesting.
... until I stumbled into a religious chat room.
Got my account disabled and had to have my mom call as well.
one thing i learned fast was that a 1 line dial in bbs had good attendence, so i started to run mine after some time. was interesting, and damn cheap since nothing beats free
ICQ in 1999 had about 45 million users. There were only 248 million internet users back in 1999. That's 18% of mostly international users.
AOL was optimistic. So much so this is the actual response when they beat the street during their earning reports.
"(ICQ is) growing like a weed," said AOL President Bob Pittman. "Monetizing it" will be "relatively easy," he added.
WhatsApp has 450 million users where there are 2.7 billion internet users. 16%. Of mostly international users. Where, again, monetizing it, should be relatively easy.
But then again, why does any of this matter?
Genie's out of the bottle. The game has changed. We're playing a game of scaling now. Less than a hundred dedicated folks can change the world.
That 19 billion is a clarion call to attract even more people to what it is most of us here have been doing for decades.
If there is to be a singularity moment for the generation that grew up remembering the difference between real life and internet life, we have arrived at the internet life.
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I imagine that in 15 years (fingers crossed) we'll reflect the same situation where we assume everyone has access to the Internet and not just several billion people :)
how do I remember that?
I have no idea, but it's still stuck in my mind to this day!
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Was offered job as employee #1. Didn't take the offer. I was 15 y/o.
The icq guys are Israeli. My parents are Israeli. I spoke Hebrew fluently. I helped them fix the broken English on their web site. Later I gave them access to my AOL account so they could take a close look at AOL's buddy list when it did launch.
They also offered me UIN (the icq #) "007". I laughed it off, didn't even know at the time what 007 meant.
Always wondered what would have been if I was a few years older, not living with my parents, able to drive, and would have taken their offer seriously. To me they really kicked off the dotcom boom and for me, my focus in startups.
Even though it's a bit sad to see things didn't really evolve much since then, the bubble bursted a little later, and those kind of eyeballs-based "business-models" collapsed. I wonder if these kind of deals are the canary of another bubble bursting?
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Yes and no, they only got 20 millions in revenue last year, not even profit:
http://www.forbes.com/sites/parmyolson/2014/02/19/exclusive-...
Also, I wonder if being bought by facebook could help reduce hardware costs by utilizing facebook's infustracture
You're assuming:
A) Their growth stays the same as it is now.
B) Users on year-long free trials will convert to paying users.
These are crazy assumptions absent years worth of data.
Not saying WhatsApp doesn't have something good going, but in what world have either of the above things ever been predictable in this short of time?
Especially to validate the claim "revenue should exponentially rise"...?
But if we discount the fact that Facebook mostly paid their own "worthless" (mostly overhyped/overvalued) stock for this overvalued Whatsapp acquisition, then maybe with an order of magnitude profit, they could recover the money somewhere between 10-20 years.
For Facebook's sake, they better hope some other new disruptive technology doesn't come along in the next 10-20 years, because they won't be able to keep this sort of acquisition strategy for long.
I've noticed some articles call Facebook/Zuckerberg "smart" for noticing Whatsapp is disrupting them - if you can call noticing a disruption so late in the game that you now have to pay $19 billion to buy it, and with almost zero expectations of recovering the bulk of the money in the next decade.
What would be much smarter is using your own engineers to build that next disruption, or at least buy the ones appearing very early in the game. Zuckerberg could've bought tens of such apps in their early days a few years ago, and he'd still be much better off today. He could've owned Whatsapp, Kik, Viber, Line, and many others for much less.
[1] - Analysis of Whatsapp's revenue and profit when it had half the user-base it has today:
http://www.quora.com/WhatsApp-Messenger/How-much-revenue-is-...
Could they, though? Facebook's DNA is information accumulation. As is Google's.
WhatsApp is the antithesis of this, and the likely outcome of this acquisition is the gradual decline of the product as people flock to whatever new, unburdened, anonymous replacement comes along.
But for a while it will boost the stock price because it keeps user engagement seemingly high.
I don't think companies have DNAs. Just idiotic managers who don't give enough freedom to teams to work outside the company's box.
Probably we remember because the client made you type it to log in? I forget, but I feel like this is true :)
I no longer have access to the @r33t.org email address, nor do I know the password. Unfortunate.
edit: Looking at the profile it seems that a Russian hacked/took over the account who knows how long ago.
Thought about selling it on ebay, since six-digit accounts used to fetch a non-trivial amount of money. But decided it wasn't worth the $100.
But people had the habit of exchanging UIN and this was it.
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Facebook is already becoming the world's phonebook. Connect with someone and you have a way to contact them.
Facebook is also heavily pushing it's messaging app on the main Facebook app. I think that WhatsApp will be integrated with (or replace) Facebook messenger.
This combination builds a powerful base for an eventual Facebook phone with a free data/voice plan (the phone would have a base price, but service would be free thanks to the sale of ads ala Kindle Special Offers). Think about it -- if you could call, text, and message all of your contacts, for free, from within the Facebook app, why wouldn't you do it?
If Facebook follows that strategy, they will get their 19 billion out of this deal for sure.
It was not.
For context, I rarely remember my anniversary.
EDIT: I just logged in. Out of the hundreds of contacts I had, there's one sad guy still online.
Which one is it?
But magnitude of the money aside, has an online messaging service ever been able to really turn a huge profit? chongli points out that AOL eventually sold ICQ for less than they paid, and I can't think of any others off the top of my head (AIM didn't prevent AOL from being overtaken by Facebook, say). They seem to be very un-sticky in terms of user retention by their nature.
> Orey Gilliam,[6] who also assumed the responsibility for all of AOL's messaging business in 2007, ICQ resumed its growth and turned into a highly profitable company, and one of AOL's most successful businesses.
Not worth a lot though, as the subsequent sales showed just how much money they'd lost.
You could make the argument that Tencent did, as some are apparently doing when comparing them to Snapchat and seeing visions of billions dancing in their muddled heads.
But that ignores the Asia factor. Where it's not uncommon to find one conglomerate company making toasters, lamp shades, bars of soap, and rockets. Tencent makes video games and they also run the equivalent of PayPal. And, of course, they pimp out their cuuuuute mascot. Since, you know, it's Asia. WhatsApp has a generic-looking icon and no mascot. They are pretty much doomed.
Now if the goal were to acquire users. its far more likely that facebook would have a huge overlap in the number of users it has already and those on whatsapp. That means maybe a cost of acquisition at let's completely speculate $100 dollars per user(maybe more). It seems kind of silly. but then you think about their penetration in developing markets and network effects... I don't know I'm not zuck.
BUT on a complete tangent of my comment. I should start an Israeli chat company. they've had some big exits.
The US is Facebook's biggest market but I would bet the US is no where near the top of WhatsApp's market list.
I mean: you are supposed to learn a real profession so that you will be able to create real value, whereas real value is actually assigned to messenger apps.
We are in a bubble now I presume.