Our new Marketplace Crash Course is here to help. Sign-up for free, learn at your own pace.
Facebook is paying $19 billion in cash and stock for WhatsApp, the text messaging app that lets users send messages anywhere on the planet, basically for free.
If you do the math, with WhatsApp’s 450 million users, that comes out to $42 for each active user.
Users like Caroline Duke, 27, who uses WhatsApp to text with all of her friends abroad.
“Most of my friends do have it. It’s easy, it’s immediate.”
And, of course, it’s free.
So if Facebook is paying $19 billion for WhatsApp, which amounts to $42 per user, does that mean Facebook has to find a way to squeeze $42 out of Caroline? ‘Cause that’s gonna be tough.
“I don’t like ads….and I would probably explore other options before paying,” she says.
No, it does not mean that.
“I guarantee that Mark Zuckerberg did not come up with his final offer simply based on some number he crunched to say, ‘Well this is how much I can make per user,” says David Rogers, professor of digital marketing at Columbia Business School, and author of The Network Is Your Customer.
For starters, WhatsApp’s user base has grown dramatically – faster than Skype, Twitter, or Facebook itself.
“It looks like they could achieve 1 billion users in the near future,” says analyst Tristan Louis, founder of gaming social network KeepScore. If that growth pans out, Facebook would be getting many more users, and the “price per user” would go down.
But second, says Rogers, the purchase has strategic value.
“Half that money it paid may have been purely a defensive move so it doesn’t get cut out of this very fast growing space of mobile messaging,” he says.
Specifically, Facebook is paying to lock down two groups it risks losing in mobile messaging, says Cathy Boyle, a senior analyst with eMarketer. “What’s app has really high penetration in a lot of emerging markets,” says Boyle. According to eMarketer, 72 percent of smart phone users in Brazil use WhatsApp, compared to 49 percent who use Facebook Messenger.
“WhatsApp is also very popular with that younger demographic,” says Boyle – a demographic that has been less wedded to Facebook than its preceding age groups.
Still, at some point, Facebook would like to make money.
“If any company in the world has insight into hidden value, I think Facebook would have that better than anyone,” says Victor Hwang, CEO of venture firm T2 Venture Creations. “Zuckerberg has said he doesn’t want to use ad based models, but users and spending patterns have inherent wealth and value,” says Hwang. “Part of the philosophy of Silicon Valley is that you know there’s value there,” says Hwang. “You’re not exactly sure how you mine it, but you know if you have the right people, and the right way of thinking about it, you’ll eventually find a way of extracting that value.”
Really, what Facebook is paying for is relevance in the future. And who knows what’s that worth.
Of course, Facebook could be totally wrong, and is paying way too much for WhatsApp. That’s also possible.
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.