WhatsApp: You Get What You Pay For

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Southwest Airlines has 700 Boeing jets, carries over 130 million passengers per year, has 45,000 employees, and net income of over $400 million. Its market cap is $15 billion. Facebook agreed to purchase WhatsApp for $19 billion.

At first I thought the acquisition headline was a mistake. It was just eleven months ago in April 2013 that WhatsApp denied rumors it was selling to Google for $1 billion.

Next I did what many others did and Googled WhatsApp. Then I saw the WhatsApp service is free. Who wants to spend $19 billion on a company without any revenue when I just booked $400 on a Southwest Airlines flight to Parallels Summit?

In researching I almost signed up for WhatsApp as it seems like a great service. Then I saw the old bait-and-switch coming. Yes, WhatsApp is free for the first year. After the first year they are going to sock me $0.99 USD/year.

The company claims that it has 400 million active users, and has rocket growth, adding 100 million users in the last four months.

Let me underscore the term ‘claims’. In my book a customer is active after they have paid for the service. I calculated WhatsApp’s last twelve months revenues based on WhatsApp’s public statements, at best the company should have collected $175 million. That would make this a 109x trailing revenue transaction.

I am very skeptical about what I term as active customers. Some 32 percent of smartphones in the United States are pre-paid. WhatsApp traffic is well over 25 percent from undeveloped countries. Throw in 15 million free government phones in the US and worldwide disposable phones plus every phone that turns over in a given year. I think there is a lot of slack in that 400 million active customer number. My guess on a good day 225 million from the current active base, with expenses based on the traffic of 400 million.

Could this transaction be about advertising? Like a flag of honor WhatApp eschews advertising and collecting data. In the deal, Zuckerberg signed on to those caveats.

This is not about revenues. It is about potential eyeballs and technology. It’s about how to bring back the sub-24-year-old demographic to Facebook. The base that loves to text and is moving to Twitter in droves. It’s someone blowing on the dice, making a technology crapshoot.

In conclusion, if the service is so great, why is it only worth $0.99 USD/year?

Later – Tom

Find out more about Tom Millitzer: NCC International FB

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