Following the announcement of Facebook’s intentions to purchase the cross-platform messaging service WhatsApp for $19 billion, some people were left wondering how Facebook came up with that valuation. How could an app that generates no ad revenue and is free to use in the first year be worth more than the GDP of over 80 countries?
Though it might feel like Wall Street is simply picking numbers out of a hat when deciding on valuations, it’s safe to assume that Facebook’s M&A brass analyzed a number of factors to come up with the $19 billion figure. And today, we’re delving into their minds to figure out what factors influenced their valuation calculations. Take a look.
What is WhatsApp?
WhatsApp is a messaging tool that uses Internet connectivity rather than a mobile network to provide users with a low-cost messaging service. The application's cross-platform design has made it a popular choice across multiple OS devices. Where Apple’s iMessage is restricted to only iOS users, WhatsApp allows its subscribers to message across a number of mobile operating systems; an iPhone user can chat with an Android user and a Windows phone user can message a BlackBerry user.
The service is free in the first year and costs US$0.99 per year thereafter.
How popular is it?
WhatsApp’s popularity has exploded in the past year, doubling its user count to 450 million in that time. Seventy percent of those users are active on any given day. Facebook, meanwhile, boasts a user count of 1.2 billion but a lower engagement rate (62 percent) than WhatsApp.
Certainly, these figures piqued the interest of Mark Zuckerberg. But perhaps the most intriguing statistic to the Facebook CEO is WhatsApp’s daily messaging rate: WhatsApp users send 19 billion messages per day, including 500 million pictures. Facebook users, on the other hand, send about 350 million pictures daily.
In short, WhatsApp’s growth rate, user count, and daily usage figures make it a one of a kind company. And when you’re outperforming Facebook, you’re bound to get noticed by corporate big shots with deep pockets.
What values does it bring to Facebook?
With Facebook’s seeming quest for global communication domination in full swing, WhatsApp fits nicely in the social media giant’s product mix. The number of WhatsApp messages sent on a daily basis nears SMS message levels. In fact, one day in June 2013, WhatsApp handled 27 billion messages – 42 percent more than SMS messages sent on a typical day.
Why does it makes sense for Facebook?
WhatsApp brings high usership and the promise of growth to the Facebook portfolio. And with Facebook adoption rates slowing and daily usership rates lagging, the acquisition of WhatsApp by Facebook makes sense. Additionally, though Facebook doesn't plan to generate ad revenue from WhatsApp, the increased traffic that WhatsApp will bring to Facebook will increase its respective ad revenue. And as Facebook is making its move beyond social media into the global communication space, WhatsApp aligns neatly into Facebook’s strategic roadmap.