WhatsUpp?

Citation

Curwen, P. (2014), "WhatsUpp?", info, Vol. 16 No. 3. https://doi.org/10.1108/info-02-2014-0011

WhatsUpp?

Article Type: Rearview From: info, Volume 16, Issue 3

A regular column on the information industries

Everyone is on Facebook these days – well, this author excepted – so it is fast acquiring dinosaur status in an ever-changing technological world. And sure enough, there is already a group of challengers making the running among those users who do not want to be part of something that lacks edge and exclusivity.

So what is to be done? Well, the simple answer is to buy whatever looks to be presenting a dangerous challenge to your position, using your (overpriced) stock to hurl such ridiculous sums of money at your target that refusal is simply not on the agenda.

But isn’t that what happened some 15 years ago, and did it not all end in tears? Indeed, although this time around there are far fewer companies with overpriced stock and huge cash reserves – which is not necessarily a good thing because such companies have unprecedented economic power.

In the current case the target is WhatsApp, an instant messaging service with approximately 450 million users who access the service so regularly that arguably only Facebook itself has more daily engagements per user. How it works is that you enter your phone number and WhatsApp looks through your contact list for other people using the app with whom you can then communicate without any word limit. The crucial point about WhatsApp is that anyone with a smartphone can send messages without any charges other than a $1 annual fee after the first year – although, slightly oddly, most operators anyway now provide thousands of effectively free texts in their monthly contracts. But it is also possible to use WhatsApp for group messages and the messages come up instantly on a handset without the need to open an app as is necessary even with Facebook. Furthermore, many users value the fact that the service is (for now) relatively private, as Facebook, for example, does not have a good reputation for keeping user details to itself.

But WhatsApp is only five years old with a mere 55 employees, so it is effectively only one stage on from a start-up which inevitably means that it is losing money and it has no obvious formula for making any profits in the longer term, as there is no advertising involved. So it obviously cannot be worth much, can it? In early February, Japan’s Rakuten paid $900 million for a similar company called Viber, which itself seemed to be somewhat excessive, so the $19 billion that Facebook subsequently offered for WhatsApp can at first sight only be described as irrational in a market without barriers to entry and dependent upon fickle users.

Unless, of course, you are Facebook which does little more currently than serve as a means for exchanging messages, pictures and videos. In the first place, Facebook is no longer particularly “cool” – after all, most teenager’s parents and grandparents are now users, at least in Europe and the USA, and that is the epitome of “uncool”. As a result, its user numbers in established markets are falling rapidly – three million teenagers in the USA have departed in three years and the trend is accelerating – which means that it must either build the brand in new markets or acquire user numbers en masse via acquisitions, which is a whole lot quicker.

Overall, Facebook is allegedly growing as it expands into emerging markets – it claims to have recently increased its user base to an astonishing 1.25 billion – and its stock market valuation is approximately $170 billion. As this is equivalent to $140 per regular user and the cost of WhatsApp can be converted to an equivalent of $40 per regular user, the deal superficially looks sensible. The problem is that little is known about WhatsApp beyond its user numbers, and its big selling point as a start-up was its rejection of advertising. But without advertising, how does a social media site make money? One could, for example, go back to the Internet bubble of 1999 for inspiration, because at that point Yahoo! paid $16 billion, mainly using its own overvalued stock, to buy GeoCities – a pioneer of social networking – only for the latter’s users to depart in their millions when Yahoo! started to charge for previously free services. But that analogy would not go down well at Facebook’s headquarter.

The truth is that the issue is fundamentally much older than Facebook itself. Why, for example, are so many cookbooks remaindered? The answer is that a publisher cannot be certain which books will sell well and which will not, so acquiring every possible new manuscript guarantees that your rivals will not get hold of the money-spinners and the rest can, in due course, be dumped. Similarly, no one really knows what technological development will attract users in their millions, so the simplest strategy is to buy every one that shows signs of taking off and that way your potential competitors are kept at bay. Naturally, this strategy requires the preexistence of an overvalued share price, but there is always the specter of Google to keep you on your toes.

The other key issue is that those users who remain loyal after an acquisition will be locked in to the bigger entity, and hence may prove willing in due course to avail themselves of other – preferably charged-for – services. Furthermore, the larger the range of services available in one place, the more attractive you will appear to be compared to your rivals, especially if they are basically supplying a single service. But this, in turn, means that the various services must be integrated smoothly, and history suggests that this is easier said than done. For example, the mighty Microsoft paid $8.6 billion for Skype in May 2011 despite the fact that it had previously been bought and sold (at a loss) by eBay, used technology that functioned patchily and generated little revenue. The prospects of integrating it successfully were accordingly poor but the acquisition did serve one useful purpose – it prevented Skype from being bought by Google or Facebook.

The most skeptical way to view current developments is to argue that the first sure sign of a bubble is when a company is valued on the basis of its revenues while ignoring profitability. The next sign is when it is valued on the basis of its user numbers while ignoring its revenues. The final sign is when it is valued on the basis of its future user numbers as against those currently signed up. During the first two months of 2014, an extraordinary $40 billion has been spent on technology start-ups in the USA alone. Instagram cost Facebook $1 billion in April 2012 – user numbers subsequently rose very rapidly although this made no difference to its loss-making financial model – but at an eventual $19 billion the WhatsApp purchase undeniably harks back to the previous Internet bubble.

Some commentators remain sanguine, arguing that even an ad-free model is besides the point when there is a valuable stream of user data on tap which can be used for targeted ads on Facebook and Instagram and which is de facto denied to rivals. Dissenters claim that if you keep giving away your stock to acquisitions – 8 per cent in the case of WhatsApp – then the model is unsustainable. So it’s boom or bust, take your pick.

About the author

Peter Curwen is Visiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK. Peter Curwen can be contacted at: mailto:pjcurwen@hotmail.com