For the past week, everyone has been going crazy over the big news – Facebook bought Whatsapp for 19 Billion Dollars. It’s not really 19b (as I’ll explain in a bit), but still this goes down as the biggest tech startup acquisition in history. The discussion revolved around how ridiculously big the price tag was, but I believe that misses the point. Facebook are in trouble, and they are acting in self defense. They have a strategy, and executing that strategy is mission critical, regardless of the price. The internet is filled with articles that explained why Google overpaid for youtube (1.6b), Facebook overpaid for Instagram (1b) and on and on. These companies make huge bets. Some pay off, some fail. But not making those bets is how a company reaches irrelevance (Yahoo, Microsoft)
So – why is this a good deal?
Facebook don’t have a mobile platform, so they are forced to come in the back door
Facebook are transitioning themselves nicely towards the mobile world. They have the fastest growing advertiser platform for mobile. More than half their revenues come from mobile. But they are forced to use mobile platforms owned by Google and Apple. That means that they don’t control the experience, and that they are constantly threatened by these two companies, that can effectively shut facebook out. The more services facebook controls on mobile, the more protected they are. Again, they took a lesson from Google, which did an amazing job taking over iOS by building great apps for google services, even if it’s not on their own platform. By controlling a core mobile functionality such as messaging and phone calls (rumored to come to whatsapp very soon), they protect themselves from being shut out of the mobile game simply for not having their own OS.
Facebook is playing Whack-A-Mole
Whatsapp is very popular here in Israel. Everyone I know uses it religiously. Facebook messenger didn’t catch on as the go-to synchronous communication app between friends (essentially where chatting and media sharing takes place between friends and groups). It’s hard for people to trust the facebook brand with things other than its core offering (the original social network). This is why facebook mail failed. This is why Facebook’s snapchat clone failed. This is why facebook messenger is not dominating.
Facebook is playing a strategy of allowing startups that threaten its core offering to rise, only to buy the successful ones. Facebook realizes they won’t be able to build the next big thing, but they can definitely buy it. Facebook doesn’t see itself as a social network, but as a social conglomerate. They want to own the big brands in the space of social interaction and media delivery, and keep them far from the facebook branding.
Although they won’t be able to monetize on these brands properly (when they bought instagram, the company had zero revenues), they will generate value and prevent their current business from falling apart. They’ll “figure out” the revenues later on. This is very similar to Google’s strategy (youtube, waze).
The main problem is that this strategy is not sustainable. Facebook don’t have unlimited cash. They just spent all of their profits in 2012 & 2013 for whatsapp, and this is just on the cash part of the deal ($4b). They also diluted their shareholders by almost 10%. That may be ok if it’s a one time thing. But if successful competitors keep coming, they won’t be able to continue this strategy
Facebook are buying growth and a new business model
The Facebook brand is declining. It’s a lost battle for facebook, as they reach market saturation in developed countries. As a public company, they find it utterly impossible to build the next growth engine in-house, so they are forced to buy it.
Whatsapp are supposed to launch voice calls soon. Facebook wants to be the global telecommunications company, turning the phone carriers into dumb pipes. That’s massive business
In deals so big, traditional accounting doesn’t work.
$19,000,000 is a lot of money. However, only 4b of that is in cash. 12b is in facebook stock (which has since risen, so that number is actually higher), and 3b is in stock options for whatsapp employees (for employee retention)
But that’s just part of the story. When evaluating companies that reach this kind of scale, looking at how much revenue whatsapp is making is almost irrelevant. Why?
A) Facebook aren’t buying whatsapp for the revenues, current or future. They are doing it because they have to. Therefore the price is a question of supply and demand. There is only 1 whatsapp, and quite a few companies that are willing to buy it (google was rumored to pay the same amount). So the only thing that matters to evaluate the deal is: “How much do I need to bid in order to make sure it doesn’t fall in the hands of Google, like Waze did”.
B) It’s mostly non-cash, therefore doesn’t harm the business in the short term. Shareholders get diluted, but if this deal transforms facebook and propels it to where it wants to be, they’ll be happy to have paid. If not, they are screwed either way.
Good move facebook. Now the question (and topic for next post) – where the hell is Apple??