Breakthrough innovation in instant messaging – Facebook buys WhatsApp

by Jörgen Eriksson on February 19, 2014

imageSo, tonight it was announced that Facebook buys the messaging service WhatsApp. The purchase price is an incredible $16 billion in cash and stock. What can possibly motivate such a high price?

There are two reasons. One is that WhatsApp can be a ticket for Facebook to gain a stronger foothold in emerging markets, where WhatsApp is the dominant instant messaging application. In total WhatsApp has 465 million active users.

WhatsApp launched in 2009 with the right focus on a lean, clean, and fast mobile messaging app, and while the international messaging market is incredibly fragmented, it was able to gain a major presence and become the dominant player for all generations and geographies of smartphone users. Breakthrough success through disruptive innovation, by simplicity and focus. I did not like it myself at first, but of course I have it and use it, as everyone else does.

Another reason is that acquisitions like this boosts the balance sheet of Facebook and will drive up its market valuation. It is a greenbuck game, after all.

$16 billion and 465 million active WhatsApp users means a price of $34,4 per user. In November last year Forbes wrote that according to stock market valuation, a Twitter user was worth $110; a Facebook user $98 and a LinkedIn user $93. In this comparison the WhatsApp acquisition is cheap.

Does the valuation make sense? Well, Facebook have said they will not sell advertisements on WhatsApp or try to increase income from WhatsApp in any way in the short run. They will instead focus on expanding the user base further. That is, their objective is to develop a walled garden where Facebook wants to protect its current profitable business model by disallowing anyone else access to WhatsApp’ s user base. Google would have been another potential buyer. Tomorrow we will see what the stock market says.

Below is an infograph made by KRDS, which shows the market domination of the ten most popular instant messaging solutions.

Top instant messaging applications

Finally, here below is a video from Wall Street Journal, about the competitive field for smartphone instant messaging.

WhatsApp´s More Colourful Asian Rivals

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