What’s up at Facebook? An Alternative to Advertising, That’s What

What’s up at Facebook? An Alternative to Advertising, That’s What

Silicon Valley is buzzing with commentary on Facebook’s $19 billion acquisition of international messaging platform WhatsApp. Some are calling it a brilliant, bold move, with Facebook “skating to the puck” by jumping deeper into mobile communications. Others warn that this kind of valuation is astronomical, at about 950 times WhatsApp’s revenue last year of about $20 million, according to Forbes Magazine.

While the big number being discussed is the $19 billion purchase price, there’s a good argument that this may turn out to be a bargain in the long term.

450 million

That’s the number of WhatsApp users. This means that Facebook is paying $42 per user. Compare this to a market value per user of $170 for Facebook and $212 for Twitter, according to analyst Ross Sandler of Deutsche Bank. WhatsApp users are expected to double to about 1 billion by 2015, according to analysts. Its active user base is currently growing at 3-8 times the pace Facebook, gmail, Twitter and Skype grew during their first four years. If WhatsApp reaches a billion customers by next year, the price per user is just $21, a bargain compared to the calculated value of users of other social networking programs.

Whatsapp and value global upside

Source: Techcrunch

Paying Customers

WhatsApp users pay 99 cents per year. In fact, only some 4% of WhatsApp customers pay, but still, that’s 20 million people worldwide. Suddenly, Facebook has users who are paying customers. Companies like Facebook and Google are searching for new revenue streams, and WhatsApp brings a proven model of a service that millions of users value enough to pay for.

Anti-Advertising

But WhatsApp is fundamentally anti-advertising. You can read the founders’ justification for this here. Basically, they believe that by respecting their customers’ intelligence, they will be able to sell their product directly, delivering a better product and a better customer experience. According to an interesting blog on WhatsApp backer Sequoia Ventures’ website, WhatsApp charges: “a dollar for a product based on knowing as little about you as possible.” This is fundamentally different to the business model that Google and Yahoo are chasing, namely selling targeted advertising based on collection and analysis of reams of data on the tastes and habits of their users. Could WhatsApp be right that highly targeted advertising is not a profitable business model? That’s what Internet commentator Doc Searls suggests in his blog on the Harvard Law School website: “Mobile advertising is proving to have some negative value.”

jan koum global upside

If you watch Facebook closely, you’ll see that Facebook has been of two minds regarding advertising. While it has moved aggressively to modify its privacy rules and open up various feeds to advertising on both computer and mobile versions, the company, and Zuckerberg himself, have repeatedly commented that the “user experience” is more important than the pursuit of revenue. Zuckerberg sealed the deal with WhatsApp CEO Jan Koum with a phrase along the lines of “Let’s connect the world.” Not “Let’s sell to the world.” And putting Koum on the board of Facebook certainly gives the anti-advertising evangelist a powerful position to influence Facebook policy. Can a company that doesn’t like advertising make money? Facebook may be betting that if you have over a billion users and the right obsessive focus on the user experience, you can ultimately find a way to be highly profitable.

Is this a bold, brilliant move or the latest bubble? Only time will tell.