It's not one datapoint. Instagram, Snapchat, WhatsApp. Three smallish companies, three mind-boggling valuations. I don't think it necessarily indicates that there is a bubble, but it does sound like funny money.
I think Nest was a fine buy. They got a hardware company shaking up what was sort of a dead industry (name me one other brand of smoke detector), but also gets them the ability to spread Google in to the home (you're going to see full home automation from Google soon) and they got the designer of the iPod. Decent buy.
Honeywell: I remember it because I bought the 'programmable' one for 199. It was a pain to program, separate programs for cooling and heating, a pain to set right and it looked, well like a beige box on my wall.
When I moved and they had an ancient thermostat it was easy to pay $50 more than the above just so I could control it with a phone. Setting the program is much, much easier than the Honeywell.
I think they bought best for the team as much as the product and I hope nest does sprinkler systems next in their pursuit of solving first world problems.
Money is a lot tighter in most other deals. It's nothing like the wild west of the dotcom era where companies were formed with little more than a mission statement and they'd get pumped up.
These types of financial articles are the worst because they are unable to accurately predict the future of new markets. They're the types of articles that you read a decade later and kind of pat on their head.
Skepticism of an industry is one thing, but most of the time that skepticism is not coming from any type of informed or even historically accurate perspective. It's just not understanding what the current market price of things is. Which is pretty dangerous for a newspaper article writer.
Instagram is a bad example. As far as we can see, Instagram has kept on growing and growing, and the ironic thing is that all those blog posts talking about how teens are leaving FB show them flocking to Instagram. So it was obviously a brilliant strategic move, and time will tell if it was a brilliant revenue generating move (I suspect Instagram will make buckets of money eventually, like YouTube does).
The key thing to look at to see if it's a bubble is IPOs. And as far as I can see, good companies are the ones IPOing successfully, and less stellar companies (Zynga, Groupon) are getting punished.
huh? AFAIK I've heard nothing of the Instagram exodus, and its actually growing. Are we sure that Instagram is actually in a bad spot, or are we just praying for doom and schadenfreude?
The "switching" you speak of has not happened and I've never seen any numbers that back up that claim (specifically, that they're leaving Instagram in favor of Snapchat). Sure, lots of teens are using Snapchat now; doesn't mean they're leaving Instagram.
According to my sister (as well as all the data I've seen and the literature I've read on the subject) the usage of Snapchat and Instagram are BOTH increasing in popularity. The kids aren't as into Facebook though.
I don't see much analysis of the obvious underlying motive: destroying the bargaining power (SMS) of the phone carriers, who are currently extracting vast sums of money from (mobile) Facebook users.
We are, but I find it distasteful how people are reacting to this deal. I think a lot of people really don't understand exactly how popular this thing is. Who cares if people in India use it, I haven't seen it in my personal little bubble so it must be pure hype.
People are taking out their feelings about other aspects of the industry and the economy on this deal. If you're one of the people bitching about how startups focus too much on the problems of rich young men, what's not to like about this? What is more broadly useful than a messaging system?
Just because something is popular doesn't make it inherently valuable, because popularity is often fleeting.
Over the past fifteen years nearly all messaging platforms have had bell-curves of popularity. MSN, ICQ, AIM, BBM. What stops users of WhatsApp from moving onto another platform? Nothing.
Personally I think the deal is bad for Facebook because they've spent $16+ billion acquiring users that are ephemeral. They are not buying technology. They are not buying talent. It is purely a user buy.
This is a point well made, but ~marketable demographics are relevant to a biz based on ad revenue like FB. So it is a legit concern if new customers are dilutive from this perspective. But...and this is the big but...the what's app M&A deal seems to be purposefully orthogonal to "ad based eyeballs" both from a product and a strategic perspective. Comms svcs are actually inherently valuable in their own right (point 1) and often this value is ruined by advertising (point 2); as a result things like mobile telco is paid for by services fees rather than intrusive and manipulative advertising. Now, with those two counter-balancing points being made, the valuation question for any company (pre-IPO) with a $19B purchase price at something like 40x Revenues (assuming ~$500m/yr) is still open to legitimate "interpretation" (er, questioning). I don't think pure math questions can be dismissed out of hand on that. The one explanation that does likely have some grain of truth to it, is whether or not we are in a 'bubble'...FB is protecting its valuation. That is to say, the damage done by <in>action is likely to cost FB more than $19B if they get leap-frogged by the next major evolution in the market. So, in other words, it seems there is some logic that backs this deal with or without the bubble question really being relevant. At least to FB.
I don't know if WhatsApp is a good buy for Facebook or not. But I do remember when people cried "bubble" at Google for purchasing YouTube (after all: it was too much, it was only valuable because of illegally copied content, there are hundreds of video sites, TV companies can do the same thing), and now they look pretty silly.
$16B ($1B) for a hardly profitable mobile app (video sharing site) seems stupid. $16B ($1B) for the future of telecoms (TV) world wide seems a bargain.
I'm not sure how this matters. I could make infinite gross revenue handing out money to people who agreed to give me half of it back right away. Call it "Bitcoin", and I could even manufacture it myself, turning the gross into net!
It matters because there is a clear path to profit (unlike the "give away money" model).
The market sees it like this: Their costs are high because they (Google/Youtube) are investing to support high growth. At some point the growth will taper off, and so will the investment (because you invest to support larger numbers in the future), but the money keeps rolling in.
Google has deep enough pockets to invest in that for a long, long time.
I'll bet they'll never attribute the value to Youtube that comes from being able to better target ads off-Youtube based on your Youtube views. Youtube might lose on paper, but generate more value in total for Google than direct costs.
Google also gets a whole pile of AV to do speech-to-text and other analysis on (before any additional compression) that no other firm gets a chance to do.
People will cry bubble when any software company is purchased by another for large sums of money. It seems to just be a reaction to the "But, they don't make anything real," I mean heck, other large companies with far fewer users get purchased for far more and people don't bat an eyelid...
/shrugs
Who knows. Continually predict a bubble, and everyone forgets that you were wrong for over a decade when it finally happens...
Someone reporting on this noted that Zuckerberg could have purchase the entire NBA. I'm not playing in this casino, but I do wonder who will end up with the tab. I suspect we'll find out soon.
Youtube at the time had a massive marketshare in terms of video hosting and sharing (mostly because it was one of only a few which actually worked properly). Whatsapp is popular, definitely. But it's one of hundreds of messaging platforms, and I suspect it doesn't have anything like a majority share in the worldwide messaging space.
The similarities are of course that they're both defensive aquisitions - the money is justified not on its earnings potential but that it could be the start of a new social network that ousts Facebook. If that really is the case, $16B is well worth it. Facebook's aquisition strategy at the moment appears to be 'overpay for anything that could be the next Facebook to their MySpace'. It'll probably work, too - at least for the near future.
But that said Whatsapp is not very popular in Australia so I have a skewed perspective (current marketshare here seems to be roughly a 50/50 split between legacy SMS and Facebook mesenger).
> I suspect it doesn't have anything like a majority share in the worldwide messaging space.
Whatsapp has 450 million users. The issue is that most Americans (and Australians, in your case) have never heard of it, so they assume that it's not very popular.
I have heard of it and have used it - I'm not surprised at the 450 million users figure, but the global messaging market is measured in in billions. Even people in third world countries use SMS - they do not have the ~90% marketshare which YouTube had when it was purchased.
In Australia it just, for some reason, never caught on - many people I know have accounts (as many as say, Instagram, for comparison) - it just seems to be something people try but don't stick with. Which in a sense, is a pity, as it's demonstrably better than SMS.
But in Australia Facebook Messenger already has the equivalent marketshare. Perhaps between Facebook Messenger and WhatsApp, Facebook would end with a majority marketshare [of IP-based messaging] as one app is popular where the other isn't. I honestly wouldn't know.
I don't have a strong opinion about whether this was a good deal; $16 bil certainly seems like a lot of money, probably too much. But I think you're underestimating their market share, broken down by country here:
From the perspective of someone who uses sims in the UK, the US and Australia I can say anecdotally why it makes sense to me. There are many more choices available in the UK. As far as Germany or the Netherlands, Spain and so on are concerned, I can't really say though I suspect it's for similar reasons.
In the US I've tended to go with an MVNO like H2O on the back of AT&T. In Australia Optus on a pay as you go. Both are choices from a limited range when compared to the UK.
You can walk past even a 3 store in the UK and see things like a monthly £5 deal with variants that increase data allowance at the expense of SMS. ( forgetting for the moment MMS which simply value adds the later proposition ). It makes sense to spend as little as possible, especially given the austere conditions, to obtain the highest data allowance with adequate voice minutes and to use WhatsApp as a replacement for SMS, which rationally appears as a tax on data allowance, given the expectation of free texting. ( And now add MMS ).
Include the street stalls selling sims for £5 to £10 with a greater focus on expat segments of the population, with data included and so a bundled international SMS substitute. Add mix and match packs from Dolphin and so on.
It's highly competitive. Use wifi when available, back up is the carriers, and get as much data and use that up.
SMS was a surprise cash cow for telcos. WhatsApp played that massive user base well I have to say. The US and AUS I think lacked the competitive market to notice it as much.
Facebook is doing the right thing by diversifying their portfolio. They've seen how quickly a social network can dry up and are wisely using their capital to avoid ending up like myspace.
If you really think about it there's not much more they can do with their original platform without upsetting some of their users. It makes much more sense for them to overpay for a product with traction than to try and spin something off of their original brand (last time they tried it with the Facebook phone it was a total flop).
whatsapp's entire business model is charging 1$ per month. for a little less than 19bn $ you could:
- build an app doing exactly the same
- run a media/marketing ad blitz
- charge 50c per year. or make it for free, until whatsapp is dead.
if it's about the awesome talent at whatsapp, 32 engineer can be hired for 19bn $. each one of the whatsapp members could have been acquired for less money besides the 2 founders.
it makes no economic sense. as in old school economics, not the valley funny money one.
don't you think that Facebook has tried this already? Facebook Messenger/Messages has a non trivial number of engineers working on it, but it still doesn't have the usage that WhatsApp does.
It's worth adding that Facebook Messenger itself began (or was at least jumpstarted) with the acquisition of a company called Beluga in 2011.
Facebook has definitely made an effort to get into this space -- not necessarily a failed effort, at that -- and it's been trying for years. The idea that "Facebook can just build its own WhatsApp and market it" is silly, especially in light of Facebook's history here.
I'm not convinced $19B was a reasonable price for WhatsApp, unless, as I suspect, there was some heavy competitive bidding pressure. (Google tried to buy the company at $10B not very long ago; I'd imagine there were counteroffers between G and FB, which FB ultimately won at $19B.)
FB messenger isn't a replica precisely because it ties into FB. WhatsApp made it a point to be extremely easy to sign up for and to not require any other major social media accounts.
Somewhat ironically, Facebook may have been more successful in replicating WhatsApp if they had also made a messenger that was not connected at all with Facebook other than its corporate origins.
Well, buying WhatsApp for 16B is a guarantee they're no longer a competitor and you have their entire audience. Your plan takes 3.5 yrs longer, and it has a high chance of failure.
> They've seen how quickly a social network can dry up and are wisely using their capital to avoid ending up like myspace.
...they're using their capital to buy more users. There is no evidence that those users will remain with WhatsApp. They're not "avoiding ending like myspace", they are simply delaying ending up like MySpace. No messaging product has managed to maintain a dominant position over the past fifteen years - they come, and they go.
I don't see how buying WhatsApp diversifies Facebook's portfolio, because WhatsApp competes with Facebook for messaging users. Google buying Nest is a diversifying acquisition, because it brings in talent and expertise that Google doesn't have (hardware design and engineering). The only thing that WhatsApp brings to the table is users, users who use WhatsApp instead of Facebook Messenger.
No. Things can only be wrong if they're in the past. In the present, they're anointed by the status quo effect: if it is the status quo, then it is the best of all possible worlds by reason of many armchair economics-based arguments.
Long time lurker, first time poster here. There are tons of factors to this deal, but here's a simplistic take.
If:
(Google acquires WhatsApp and builds from its existing social network of 450m active users to form a mobile version of Google+ on steroids)
And:
($19Bn FB investment) minus (Actualized FB profit from WhatsApp over 10 years) is greater than (Potential lost profit to Google+WhatsApp in the social networking space)
Then: Buy WhatsApp
I also think its been largely undiscussed that WhatsApp was a company desperately wanted by both Google (for a, finally, serious attempt at competing in social networking) and FB (for a bunch of reasons, as well as defending against a potential Google acquisition) really helped to significantly propel this deal valuation.
Maybe I'm missing something, I've never used WhatsApp, but how do you get from it to mobile Google+ on steroids?
It's text messaging (including group text messaging) over the internet. In other words a very stripped down walled garden email system -- like we had on Prodigy in the mid 80s.
Once it got off college campuses, Facebook's killer app was discoverability. That guy you went to high school with? The girl you met at the party last weekend, and you only know her first name and who she came with? Your brother-in-law's brother who offhandedly mentioned that he had season tickets he wanted to split? All of them could be discovered on Facebook without having to tediously trace the chain.
I'm hard pressed to see how you can have a social network without discoverability, even leaving aside the text only nature of the thing. Pictures were were Facebook's zeroth killer app, without those it never would have taken off even at Harvard.
WhatsApp revenue is $1/user/year for all users who have used the service > 12 months. So, revenue is somewhere south of $450 million, but certainly a 9 figure number. That's real revenue.
What would be interesting is to know the gross and net margins, plus growth rates. With these numbers you could back your way into a valuation using various traditional valuation models.
That said, my opinion is this deal is a mix of traditional business plus Zuckerberg's vision. The first and only time I got to hear Zuckerberg in person was at Startup School in 2013.
Zuckerberg made some very interesting comments at Startup School. Basically, it was something along the lines of FB already has almost everyone who can afford a smartphone (i.e. developed markets) as a user. The next big idea is to help connect the next 6 billion people to the Internet...and then he went on to say this is an exciting idea but may not be good business. Make of that comment what you will.
> The next big idea is to help connect the next 6 billion people to the Internet...and then he went on to say this is an exciting idea but may not be good business. Make of that comment what you will.
Someone is only a customer if they have money to spend on your product/service/widget.
Except they bought an even more worthless pile of stock with it. Compare that to Google, who gutted Motorola for its IP and then flipped it for a significant chunk of Lenovo.
Bubble 1.0 was greed without the knowledge on how to value digital companies properly. This phase is greed even after knowing how to value digital companies properly.
You will come off looking really silly if an attempt is made to make sense of all these on actuals and fundamentals.
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[ 3.8 ms ] story [ 64.8 ms ] threadWhen I moved and they had an ancient thermostat it was easy to pay $50 more than the above just so I could control it with a phone. Setting the program is much, much easier than the Honeywell.
I think they bought best for the team as much as the product and I hope nest does sprinkler systems next in their pursuit of solving first world problems.
These types of financial articles are the worst because they are unable to accurately predict the future of new markets. They're the types of articles that you read a decade later and kind of pat on their head.
Skepticism of an industry is one thing, but most of the time that skepticism is not coming from any type of informed or even historically accurate perspective. It's just not understanding what the current market price of things is. Which is pretty dangerous for a newspaper article writer.
The key thing to look at to see if it's a bubble is IPOs. And as far as I can see, good companies are the ones IPOing successfully, and less stellar companies (Zynga, Groupon) are getting punished.
Instagram is a good example. As soon as Facebook bought it, the teens started switching to Snapchat, etc.
The problem for Facebook is that to be profitable it needs to connect and make visible things that people don't want connected or made visible.
huh? AFAIK I've heard nothing of the Instagram exodus, and its actually growing. Are we sure that Instagram is actually in a bad spot, or are we just praying for doom and schadenfreude?
Instagram was a great buy for Facebook (and yet people questioned it at the time).
Viber sold for $900M, and no one seems to complain. WhatsApp is much more popular & growing faster.
People are taking out their feelings about other aspects of the industry and the economy on this deal. If you're one of the people bitching about how startups focus too much on the problems of rich young men, what's not to like about this? What is more broadly useful than a messaging system?
Over the past fifteen years nearly all messaging platforms have had bell-curves of popularity. MSN, ICQ, AIM, BBM. What stops users of WhatsApp from moving onto another platform? Nothing.
Personally I think the deal is bad for Facebook because they've spent $16+ billion acquiring users that are ephemeral. They are not buying technology. They are not buying talent. It is purely a user buy.
$16B ($1B) for a hardly profitable mobile app (video sharing site) seems stupid. $16B ($1B) for the future of telecoms (TV) world wide seems a bargain.
They might still be 'losing money', but 3.6 billion/yr is plenty of money coming in.
The market sees it like this: Their costs are high because they (Google/Youtube) are investing to support high growth. At some point the growth will taper off, and so will the investment (because you invest to support larger numbers in the future), but the money keeps rolling in.
Google has deep enough pockets to invest in that for a long, long time.
Google also gets a whole pile of AV to do speech-to-text and other analysis on (before any additional compression) that no other firm gets a chance to do.
Yahoo paid Mark Cuban and his partner $11,000 a user for broadcast.com - that is a bubble price.
/shrugs
Who knows. Continually predict a bubble, and everyone forgets that you were wrong for over a decade when it finally happens...
The similarities are of course that they're both defensive aquisitions - the money is justified not on its earnings potential but that it could be the start of a new social network that ousts Facebook. If that really is the case, $16B is well worth it. Facebook's aquisition strategy at the moment appears to be 'overpay for anything that could be the next Facebook to their MySpace'. It'll probably work, too - at least for the near future.
But that said Whatsapp is not very popular in Australia so I have a skewed perspective (current marketshare here seems to be roughly a 50/50 split between legacy SMS and Facebook mesenger).
Whatsapp has 450 million users. The issue is that most Americans (and Australians, in your case) have never heard of it, so they assume that it's not very popular.
http://www.wired.com/wiredenterprise/2014/02/whatsapp-rules-...
In Australia it just, for some reason, never caught on - many people I know have accounts (as many as say, Instagram, for comparison) - it just seems to be something people try but don't stick with. Which in a sense, is a pity, as it's demonstrably better than SMS.
But in Australia Facebook Messenger already has the equivalent marketshare. Perhaps between Facebook Messenger and WhatsApp, Facebook would end with a majority marketshare [of IP-based messaging] as one app is popular where the other isn't. I honestly wouldn't know.
http://pixel.nymag.com/imgs/daily/intelligencer/2014/02/19/1...
90% market penetration in Germany, Italy, Spain, and seemingly all of Latin America makes it more than just one popular app among many.
In the US I've tended to go with an MVNO like H2O on the back of AT&T. In Australia Optus on a pay as you go. Both are choices from a limited range when compared to the UK.
You can walk past even a 3 store in the UK and see things like a monthly £5 deal with variants that increase data allowance at the expense of SMS. ( forgetting for the moment MMS which simply value adds the later proposition ). It makes sense to spend as little as possible, especially given the austere conditions, to obtain the highest data allowance with adequate voice minutes and to use WhatsApp as a replacement for SMS, which rationally appears as a tax on data allowance, given the expectation of free texting. ( And now add MMS ).
Include the street stalls selling sims for £5 to £10 with a greater focus on expat segments of the population, with data included and so a bundled international SMS substitute. Add mix and match packs from Dolphin and so on.
It's highly competitive. Use wifi when available, back up is the carriers, and get as much data and use that up.
SMS was a surprise cash cow for telcos. WhatsApp played that massive user base well I have to say. The US and AUS I think lacked the competitive market to notice it as much.
If you really think about it there's not much more they can do with their original platform without upsetting some of their users. It makes much more sense for them to overpay for a product with traction than to try and spin something off of their original brand (last time they tried it with the Facebook phone it was a total flop).
whatsapp's entire business model is charging 1$ per month. for a little less than 19bn $ you could:
- build an app doing exactly the same
- run a media/marketing ad blitz
- charge 50c per year. or make it for free, until whatsapp is dead.
if it's about the awesome talent at whatsapp, 32 engineer can be hired for 19bn $. each one of the whatsapp members could have been acquired for less money besides the 2 founders.
it makes no economic sense. as in old school economics, not the valley funny money one.
It's worth adding that Facebook Messenger itself began (or was at least jumpstarted) with the acquisition of a company called Beluga in 2011.
Facebook has definitely made an effort to get into this space -- not necessarily a failed effort, at that -- and it's been trying for years. The idea that "Facebook can just build its own WhatsApp and market it" is silly, especially in light of Facebook's history here.
I'm not convinced $19B was a reasonable price for WhatsApp, unless, as I suspect, there was some heavy competitive bidding pressure. (Google tried to buy the company at $10B not very long ago; I'd imagine there were counteroffers between G and FB, which FB ultimately won at $19B.)
Somewhat ironically, Facebook may have been more successful in replicating WhatsApp if they had also made a messenger that was not connected at all with Facebook other than its corporate origins.
You could pay 450M users a dollar a month for 3.5 years, then let network effects lock them in.
...they're using their capital to buy more users. There is no evidence that those users will remain with WhatsApp. They're not "avoiding ending like myspace", they are simply delaying ending up like MySpace. No messaging product has managed to maintain a dominant position over the past fifteen years - they come, and they go.
I don't see how buying WhatsApp diversifies Facebook's portfolio, because WhatsApp competes with Facebook for messaging users. Google buying Nest is a diversifying acquisition, because it brings in talent and expertise that Google doesn't have (hardware design and engineering). The only thing that WhatsApp brings to the table is users, users who use WhatsApp instead of Facebook Messenger.
If:
(Google acquires WhatsApp and builds from its existing social network of 450m active users to form a mobile version of Google+ on steroids)
And:
($19Bn FB investment) minus (Actualized FB profit from WhatsApp over 10 years) is greater than (Potential lost profit to Google+WhatsApp in the social networking space)
Then: Buy WhatsApp
I also think its been largely undiscussed that WhatsApp was a company desperately wanted by both Google (for a, finally, serious attempt at competing in social networking) and FB (for a bunch of reasons, as well as defending against a potential Google acquisition) really helped to significantly propel this deal valuation.
It's text messaging (including group text messaging) over the internet. In other words a very stripped down walled garden email system -- like we had on Prodigy in the mid 80s.
Once it got off college campuses, Facebook's killer app was discoverability. That guy you went to high school with? The girl you met at the party last weekend, and you only know her first name and who she came with? Your brother-in-law's brother who offhandedly mentioned that he had season tickets he wanted to split? All of them could be discovered on Facebook without having to tediously trace the chain.
I'm hard pressed to see how you can have a social network without discoverability, even leaving aside the text only nature of the thing. Pictures were were Facebook's zeroth killer app, without those it never would have taken off even at Harvard.
What would be interesting is to know the gross and net margins, plus growth rates. With these numbers you could back your way into a valuation using various traditional valuation models.
That said, my opinion is this deal is a mix of traditional business plus Zuckerberg's vision. The first and only time I got to hear Zuckerberg in person was at Startup School in 2013.
Zuckerberg made some very interesting comments at Startup School. Basically, it was something along the lines of FB already has almost everyone who can afford a smartphone (i.e. developed markets) as a user. The next big idea is to help connect the next 6 billion people to the Internet...and then he went on to say this is an exciting idea but may not be good business. Make of that comment what you will.
Someone is only a customer if they have money to spend on your product/service/widget.
Oh how things have changed.
You will come off looking really silly if an attempt is made to make sense of all these on actuals and fundamentals.