Aaron Levie, CEO of Box, tweeted recently that the “internet is crazy and exciting all at once.” This comment was made in light of the recent acquisition of WhatsApp by Facebook and was due in large part by the $19 billion price tag that was paid for it. Much of the acquisition was paid for in the form of stock so whether you believe Facebook paid too much is dependent on whether you believe social media is currently overpriced.
According to NYU- Stern Professor, Ashwanthan Damodaran, there are 2 perspectives from which to look at the acquisition. First, from a value perspective, Damodoran believes that WhatsApp would need to generate at least $2.2 billion in after-tax income from a largely fickle teenage user base to justify the acquisition price. Alternatively, from a pricing perspective, fundamentals in the social media space are out the window so you should look at the number of users and their intensity of use of the the product. When looking at the acquisition from this perspective, the price may be justified. So how can Facebook monetize the more than 450 million users of the product? They need to start by bringing some of the users on to the Facebook platform much like they did with Instagram as well as charge users a nominal fee for product usage. However, playing the social media pricing game is not a long term strategy as can be seen from the dot com era.
The more compelling strategy may be that of WeChat. Facebook knows of the success Chinese company Tencent has had developing its own messaging app, WeChat (微信 in Chinese). Barclays analysts say WeChat will generate $1.1 billion of revenue this year. With a user base of about 270 million, WeChat isn’t nearly as big as WhatsApp but it’s a commercial hit. It’s services range from buying goods at vending machines through a QR code reader to wealth management services, banking, and e-commerce. According to the Economist, WeChat will make 85% of that $1.1 billion selling its users virtual goods like online stickers and avatars. With so many use cases, it’s no wonder that the Chinese people’s lives revolve around the app. If WhatApp can become many of these things to its users then it may be able to start bringing in some of the expected income that Damodoran wrote about regarding it’s valuation.
An interesting area that is being explored by companies like Pangea (hat tip to Ari Gesher @ Palantir) is that of cross-border payments. Remittances through formal channels in 2012 were estimated at $534 billion. Many experts believe that flows through informal channels double that estimate. Between fees and the spread on exchange rates, the World Bank claims the average cost of an international transfer is 9.3%. If Facebook were to get a piece of that action by turning their eyes to the social enterprise then their aim of reaching “billions of users” could become a reality. If billions of poor people start to use WhatsApp for remittances then Facebook’s acquisition may create a new river of gold for the company. Big ifs but interesting possibilities.