Facebook pays 19bn for Whatsapp… Madness?

20 Feb

When a promising start-up gets sold for 19 bn, it’s clear that something important has changed in the world. I use whatapp myself and it’s great, but worth 19 bn?? But before we all shout bubble, it’s worth considering whether there is something more going on.

The amount that Facebook is paying for WhatsApp (which includes up to $3bn of future payments to engineers who choose not to retire immediately to a beach) is more than ten times what Google spent on YouTube. It’s also more than 20 times what Facebook paid for Instagram – another purchase of a mobile app that was seen at the time as involving a truely crazy price!! 

One message is that the sellers of companies like these have wised up to what’s at stake. In a winner-takes-all market, and Facebook wants to keep its lead.

The $1.65bn that Google paid for YouTube, or the $1.5bn that eBay shelled out for PayPal, looked like very high prices at the time. But these businesses have gone on to dominate internet video and payments – essential online activities. With hindsight, the sellers of those companies gave up on two of the most valuable online properties at a knockdown price.

The scale of activity the winning digital platforms generate can be absolutely mind-blowing. WhatsApp claims to handle almost as many messages as flow over all the world’s mobile texting systems.

Facebook is placing a huge bet that the same monetisation geniuses who have turned its own mobile app into a cash machine will work their magic on WhatsApp. Indeed, if there is any “industrial” logic to the acquisition, it seems to lie in this. But that has nothing to do with the mobile industry’s $100bn in texting fees, which are now rapidly evaporating.

In justifying the high price it is paying, Facebook pointed out that texting is a $100bn a year business. But whatsapp doesn’t carry advertising, which is Facebook’s only/main revenue earner. Let’s assume Facebook allows whatsapp to be run at arms length..how long will that last, given the huge pressure Facebook will be under to make profit on their purchase. And then how will whatsapp customers respond?

Did facebook buy whatsapp because it was scared google may do so? Did Facebook think that Google owning whatsapp would make Google a more fearsome competitor? What now if Google simply produce a better version of whatsapp, it certainly wouldn’t cost them 19 bn to produce such an app.

There are two ways to look at his mobile acquisition spree. If it turns out to be a one-off, designed to get Facebook over the chasm that lies between the desktop past and mobile future, then it will probably have been money well spent. Three quarters of the WhatsApp purchase price, after all, is in Facebook stock that is worth nearly three times what it was as recently as the middle of last year – and Facebook’s own shares have been puffed up by its recent successes in mobile.


By buying photo sharing and messaging apps, it has now bought services in two of the key mobile activities. With the recent launch of Paper, a well-received app for showing off its news feed, Facebook may also have a third strong app up its sleeve as it looks ahead.

Owning a stronger suite of apps will not be enough on its own. Not the least of Facebook’s problems will be how to secure distribution in a world dominated by mobile software platforms owned by rivals, and by mobile carriers who demand a cut. But at least it will have a stronger hand.

If, on the other hand, the disruption faceffed by Facebook reflects more than a one-off transition to mobile, then the picture isn’t good.

There is no question that being a leader in digital platforms can be very rewarding but 19 bn? For me it’s madness but maybe Facebook have spotted something I haven’t!!

Nigel Green deVere group

Blog written 20th Feb






  1. What was the valuation of Facebook, pre-IPO? and the difference in value pre & post advertising?
    $19bn may be a bargain in the long-run, considering the exponential growth of it’s user base comparative to it’s peers.
    …will be interesting to see which direction they take to stimulate business growth – they obviously have a game plan in mind!

  2. One of the main reason the price is so high is to pay off the venture capital firms who invested in the company long before Facebook showed interest. They want as much profit as possible.

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