The Exchange

Facebook buying WhatsApp — it's not a bad price, it's a bad strategy

The Exchange

Facebook (FB) is paying $16 billion for mega messaging service WhatsApp, plus another $3 billion in employee retention deals say what?

But while the price tag is drawing sneers, it’s not so far off the mark – WhatsApp has grown faster and has a larger active user base than Twitter (TWTR), now worth $30 billion. And Facebook CEO Mark Zuckerberg is paying for most of the deal with shares of his company’s hyper-inflated stock, a move right out of Warren Buffett’s playbook.

No, the real problem with the deal is the flawed underlying strategy. Buying WhatsApp doesn't solve Facebook's real problems, which involve building a bigger audience to attract more advertisers, learning its audience’s wants and desires to attract more advertisers, and keeping its audience engaged to — you guessed it attract more advertisers.

 

WhatsApp’s whole appeal is based on being ad-free, data-free and pro-privacy. Its only revenue stream is a 99-cent subscription fee users in some countries pay after using the service for a year.

And coming out of the blocks on Wednesday, WhatsApp CEO Jan Koum doubled down on the ad ban: “You can still count on absolutely no ads interrupting your communication.”

Sure, in Asia, there are a few other major messaging networks, such as Line and WeChat, that have found abundant revenue in creative ways, adding gaming and commerce platforms on top of the chattering masses. But that’s also not WhatsApp’s appeal and it makes the acquisition much different than Facebook's Instagram buy or even Google's (GOOG) once-controversial YouTube purchase.

And there are just insane amounts of competition. Any wrong move by Facebook-owned WhatsApp could send users scrambling to alternatives such as Waterloo-based Kik, with its 100 million users, or Line, with its 300 million. Even Blackberry (BBRY) has said it has 80 million users on its BBM app.

Furthermore, Facebook, Twitter and other ad-based social plays make far more money in the U.S. and Western Europe than the rest of the globe. But WhatsApp is most popular in less-developed regions. Facebook Messenger is actually a more popular download in Apple’s U.S. iTunes store than WhatsApp. Facebook may need help attracting and retaining teens, but it needs that help most in the United States.

It would be fascinating to see some demographic information about WhatsApp. Unfortunately, the company doesn’t collect any, throwing into question what if any useful data Facebook will gain for its own uses. The whole basis of WhatsApp usage in many regions is people trying to save money on excessive SMS fees. That may not provide the kind of upscale audience Facebook needs, and may offer limited commerce opportunities.

Aren't conglomerates out of style?

Then there is Zuckerberg’s whole strategy of glomming together a bunch of different, separate mobile apps. Granted, the mobile world is different than the desktop computing ecosystem that came before – people do seem to prefer separate, simple apps over multi-function messiness. But what's the point of building a stable of separate apps? There are no savings or synergies. There's a reason conglomerates went out of style.

Kara Swisher compares the deal to Disney collecting different cable channels, but all those channels work on the same business model and having them under one roof enhances Disney's bargaining power with distributors. WhatsApp and Facebook are completely different entities. And the very nature of the mobile home screen grants just the kind of a-la-carte power to consumers that Disney and cable companies abhor.

As to those who can’t believe a top CEO’s M&A strategy should ever be questioned, I present you with Google buying Motorola, Hewlett-Packard buying Autonomy, News Corp buying MySpace, Microsoft buying aQuantive, eBay buying Skype, you remember who buying Time Warner and on and on.

And, on a related note, this is how stock market valuations get messed up, combining different kinds of businesses with different profit potential under one roof. Next year Carl Icahn, for example, could demand Facebook spin off WhatsApp.

But if you’re into mobile conglomeration, don’t quibble with the price tag. It may be the whole stock market has gone nutty for social media stocks – I’ll leave that macro question to others – but relative to what’s out there, the $16 billion isn’t crazy.

Twitter, worth about double that, had only 241 million monthly active users in December, including less than half who used the service on a daily basis.

Paying $19 billion for 450 million users equates to $42 per user, much less than the publicly traded plays, Suntrust analyst Robert Peck calculates. “This is in comparison to LinkedIn (LNKD), Twitter, Facebook and Pandora (P), which trade at multiples of $153, $140, $123, and $111 respectively,” he writes.

So again, it’s not the price that’s wrong – it’s the strategy.

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