WhatsApp is up, by USD19 billion all told. Why? Why did Facebook pay more than the nominal GDP of 84 of the poorest countries in the world, starting with Honduras (USD18.6 billion) and descending all the way down to tiny Tuvalu (USD40 million). Clearly not because of the revenue WhatsApp generates, because it doesn’t. Facebook is interested in WhatsApp solely for the network effects.
WhatsApp currently boasts 1 million new unique users per day and is about to sail past half a billion. WhatsApp only employs 55 staff so running costs and hidden debt problems are not an issue, unlike Honduras. Facebook gets what it sees: an upstart start-up. Not a bad deal for Sequoia Capital, the venture capital fund that backed WhatsApp for USD60 million and now takes home upwards of USD3 billion. On that basis, Sequoia could invest in 50,000 start-ups and breakeven with just one WhatsApp.
One driver behind Facebook’s land grab was no doubt the thought that if they didn’t acquire WhatsApp today, then one of their SNS rivals would do so tomorrow. It was widely reported, for example, that Google was interested. Facebook’s revenues for 2013 were USD7.87 billion, so the purchase of WhatsApp is “affordable” in that sense – this coming after Facebook’s rejected USD3 billion offer to buy SnapChat, another OTT messaging platform.
But beyond the cents, does it make sense? It does to the founders of WhatsApp who worked to a very simple business model. Forget revenues, focus on capital value – “no games, no ads, no gimmicks” is their corporate mantra. In market terms, this model provides a huge incentive to start-ups with little money but some bright ideas and sufficient programming skills, although the latter are losing their value as software development kits (SDKs) make it easy to fashion an app out of nothing. It seems therefore to be a market just for ideas, whether it is for games or for some functionality like free-talk and video-time on devices, although WhatsApp currently is one app that does not support online video, unlike its rivals, such as Line, Viber or WeChat. Surely Facebook will rectify that pretty quickly – WhatsApp has already announced voice support in the wake of its recent success.
This raises an interesting issue. If SDKs are lowering the barriers to entry, the rapid rates of diffusion of these apps is going to be matched by an equally rapid rate of obsolesce as newer technologies make their market debuts. One such example, which may or may not make the grade, is WebRTC which with browsers such as Chrome, Mozilla and Opera – the others will surely follow – offers access to real-time audio-visual and data communications without the need of a Skype or WhatsApp or Yahoo Messenger or Facebook download. WebRTC can be embedded into websites so visitors just click on the icon and can begin a real-time conversation with the host. Or they can be embedded into apps themselves, such as a game or shopping service or taxi-booking service, offering instant real-time communications and at no cost to users if they are delivered OTT. For SMEs and private corporate users, WebRTC allows real-time collaboration across business units and geographies, and real-time outreach to customers or business partners along the supply chain using any digital device.
There seem to be two paradigms at work here. Paradigm 1 is the lowering of cost of entry within a given technology. Paradigm 2 is the rapid displacement of one technology for another. All are user-driven in the sense that if they offer easier ways of doing things, and ways to combine doing things that previously required separate means of communications, such as sending data files. They can also offer more context to those communications, for example a taxi driver can know immediately who is calling, why they are calling, when they need the taxi, can recognize them for pick-up, etc., and the passenger is able to see the driver, recognize the car, etc. But there is never just one technology that can do the job, and never one technology that can do all the jobs.
Where standards are an issue, the critical response will be from vendors. In the case of WebRTC, who will build the capability into their browsers? Where user adoption is the issue, such as for apps, the network effects of how many others are using the same app for communications will be critical. That is why Facebook values WhatsApp more than Honduras. But while in 10 years’ time Honduras will still exist, will WhatsApp or Facebook? For money-makers it doesn’t really matter, as long as one in 50,000 ‘WhatsApps’ achieve capital value in time to sell out. By which time, the likes of Sequoia Capital may well be worth more than Honduras, if it isn’t already.