Facebook Buys WhatsApp For $16bn – Why Is It Worth That Much?

Facebook has been out on another spending spree, this time in the market for messaging services. Spending massively in excess of what it paid for Instagram, Facebook bought WhatsApp for $16 billion. Broken down, that’s $4bn cash and $12bn in Facebook stock, along with a further $3bn in stock over the next four years. However, the price tag is still a bit of a head-scratcher…

Firstly, for anyone unfamiliar with Facebook’s newest acquisition, WhatsApp is a mobile messaging app that allows users to send messages, images and videos to any of their contacts. It uses the same internet data plan used for email and web browsing, so the cost of an SMS message is bypassed. WhatsApp is free for the first year of usage, and is then only $0.99 per year thereafter – a completely negligible outlay compared to the carrier costs of sending text messages over 12 months.

Now, Facebook has promised to keep WhatsApp free of ads, so even if every single one of WhatsApp’s 450 million active users converted to paid, the potential revenue stream would still be less than half billion dollars a year… And that’s a few bucks short of $16bn… So why such a hefty price tag?

Commentators and analysts suggest that WhatsApp’s overseas popularity and younger user base could be what Facebook is trying to get a handle on. Speaking to the BBC, eMarketer’s senior analyst Cathy Boyle said that “WhatsApp actually has greater penetration in a lot of international markets than Facebook”, and Ben Bajarin, from California-based technology consultants Creative Strategies, said “this is a way that Facebook can get the next billion smartphone consumers into their ecosystem”.

This was echoed by TechCrunch’s Mike Butcher, who told Jeremy Paxman that Facebook will have made the acquisition to aid growth, and believes that virtual goods will be key to further monetisation of WhatsApp. The markets weren’t too convinced however, as Facebook’s share price dropped 5% in after hours trading following the announcement of the deal.

Do you use instant messaging apps? What do you think of Facebook buying WhatsApp? Lets us know your thoughts by leaving a comment below.


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