Thursday, 20 February 2014

Facebook Buys WhatsApp

From Sky News

Facebook has agreed to buy the mobile messaging company WhatsApp for $19bn (£11.4bn), the social network has announced.

The company said in a statement that it would pay $4bn (£2.4bn) in cash and $15bn (£9bn) in Facebook shares as part of the deal.

The app's founders and employees will get $3bn (£1.8bn) of the shares as restricted stock that will vest over four years after the deal closes.

The purchase marks the largest single acquisition in Facebook's 10-year history.

WhatsApp is a real-time mobile messaging service with more than 450 million monthly users. The app has more than one million new registered users each day.

The thing with online social networks is that the value isn't so much in the site but in the network of users.

So, what Facebook are always nervous about is any new competitor that gains a bit of ground because it might be that everyone switches from Facebook to that new network. When a new network gets to the sort of "hundreds of millions of users" level, they have to get in there and buy them up so they don't threaten Facebook.

There are two downsides to this.

1. It's very expensive. You can't keep on giving away 5% of the company and a couple of year's profits to buy companies with little revenue stream.

2. It just incentivises more competitors to create build-to-flip social networking companies that Facebook is going to have to buy, making things worse. And the thing is, social networking really isn't a very hard problem for software developers.

Fundamentally, I think social networking is just not a sound business. It's built on venture capitalist money, and what those venture capitalists do is to get a great site developed that bleeds money while raising the customer base in the hope that a bigger company or mug shareholders will come along and buy it. Then the investors are stuck with a site that's not making money, so they start sticking ads on the site to try and make some, but the result is that this then annoys users (who won't pay the full value of their site) who go and find the next non-annoying social networking site. Rinse. Repeat.


6 comments:

Kj said...

The thing is that FB on it´s own seems to make a good buck, have insignificant debts and can chug along nicely, and continue to offer a good service without having to chase anyone away. It´s all that pleasing the shareholders wanting to make capital gains (dividends are so last year) that´s going to cost, as you say.

The Stigler said...

Kj,

But even then, they can't keep on acquiring every possible rival. They've spent more money on WhatsApp than that company was going to make in over 40 years with its current user base and business model. And that's what they have to do to stay alive, to stop people putting FB out of business.

Kj said...

TS: exactly, it´s a useless strategy, the buying up as rival-removal that is. As a business it´s perfectly sound, making an insane returned on actual capital employed, and it could grow and keep the semi-monopoly status (the network), if it weren´t for the demand to defend their market cap value, which implies said stratey.

The Stigler said...

Kj,

No, it's not just defending the market cap. The value of an online social network is in the people who use it.

It's like pubs. You might have a group of friends that regularly meet at The Crown. One of them might prefer the White Hart, but he won't go there because all his mates go to The Crown.

And tangentially, it's why the smoking ban really hurt pubs. It wasn't just that smokers stayed away - their non-smoking friends now found that the pub had less value because their smoking friends weren't there.

Kj said...

No, it's not just defending the market cap. The value of an online social network is in the people who use it.

Again, I agree. But it already has a very established advantage in the network, and as you say, it could drive it´s users away by introducing revenue generating annoyances. It can simply reduce these annoyances to a minimum, keeping the network advantage, and it´d still have growth without the buy up to make sure noone jumps ship strategy. As the revenue/income figures show, it clearly makes money on the basis of employed capital, hence it´s a sound (enough) business model.

Kj said...

You could say that the end result is going to be the same. Alternative A: Facebook continues to buy up any potential competitors, and continue to bleed money, requiring more revenue, chasing away clients and it´s forgotten. Alternative B: facebook does not buy up anyone, not giving out any ransom money to new developments, grows at a slightly lower rate, take the net income and run with it, but one competitor will eventually do it in with a better service. The difference is using shareholder money to pay off competitive entrants I, and the total loss is higher in scenario A, and presumably the founders do end up with a bigger payoff early in scenario A if they manage to run with parts of it.