I have a new post up over at the Deloitte Digital blog, ‘WhatsApp wasn’t overvalued’. I’d been watching the debate around Facebook’s purchase of WhatsApp [ref]Media Release (19 February 2014), Facebook to Acquire WhatsApp, Facebook.[/ref] and I was struck how many analysts and journalists were stuck in the past, trying to value WhatsApp based on the assets it holds (user base and ad inventory) when clearly the firm’s value lay in the information flow it controlled (~1,000 messages per month, per subscriber). It’s true that it you do asset-based valuation that the deal doesn’t make sense, but if you do an information-flow base valuation then the deal is a no brainer.
On of the big ideas behind the Shift Index [ref]Peter Evans-Greenwood & Peter Williams (2014), Setting aside the burdens of the past, Deloitte.[/ref] is the shift from stocks to flows: it’s not the stocks that you hold (assets, information, etc.), but the flows that you can tap into (partner networks, information, etc.) that drive your competitive advantage. Put another way, in a world where everything you need is available on demand and the world is awash with information, it’s your ability to tap into whats happening in the environment and react that defines your competitive advantage, and not the assets and data you hold.
Facebook’s purchase of WhatsApp is a great example of this difference.
Look assets that WhatsApp holds and the deal doesn’t make sense. WhatsApp’s user base of around 450 million active monthly users, many of whom will already be using Facebook, doesn’t seem to be worth the effort, especially since the company is only making US$1 per year (with the first year free). Nor is the advertising revenue of interest, since there isn’t any and WhatsApp has a public position of ‘no ads, no games, no gimmicks’. That user base, with WhatsApp as a standalone service, is not worth what Facebook paid.
Since the deal doesn’t stack up based on a standard valuation most of the pundits are calling the acquisition a ‘strategic’ move. That’s usually code for ‘we’re not sure why they did it’. However, what if we value WhatsApp based on the information flow that the firm controls?
As I point out in the article:
The average WhatsApp user sends more than 1,000 messages every month, and receives more than 2,000 messages. That’s over 30 messages a day, few of which are the spam which dominates email. It’s also a user base where over 70% of the population is active on any given day.
Facebook as a fairly low click through rate, somewhere around 0.09%[ref]Miranda Miller (23 October 2012), Facebook Click-Through Rates Increase, Costs Per Click Down 20-40% in Q3, Search Engine Watch[/ref]. What if Facebook could use the information flow from WhatsApp to double it’s click through rate? They would double the firm’s revenue, making the 16 billion for WhatsApp look like a bargain. This seems quite possible since Google is running at a click-through rate of about 0.4%, over four times that of Facebook. Google gets there by snooping on your private communications (web searches, email, instant messages) to work out what you might buy. As I point out in the article:
WhatsApp might just provide Facebook with something like that Google Search box, as WhatsApp gives Facebook a big, fat data stream that tells them what their user base is about to do. WhatsApp might not grow Facebook’s user base, and it won’t be a direct source of ad revenue. It will, however, allow them to watch what you’re saying – privately – to your friends and relatives, and then use that information to tailor the ads presented to you on the firm’s various web properties. Tell your best friend that you’re test driving a car tomorrow, and expect to see ads from car manufacturers when you’re browsing another friend’s timeline later that night.
If we value WhatsApp based on the information flows that it has, then the deal starts to make a lot of sense.
I’d greatly appreciate it if you head over to the article and leave your thoughts.
Image: Tsahi Levent-Levi