Striking it rich, dreaming of endless wealth, and finding the veritable “pot-of-gold” is part of the dream that most every entrepreneur who creates a software application in today’s business environment is shooting for. Entrepreneurs hope that the business will be attractive and sell for a ridiculous sum of money based on the evaluation. WhatsApp Messenger definitely struck it rich this past week when Facebook bought the relatively new firm for $19 billion dollars; $4 billion in cash and another $15 billion in Facebook stock options.
WhatsApp Messenger Does What?
WhatsApp Messenger, a five-year-old-company, is a (not so) proprietary, cross-platform instant messaging subscription service for smartphones. In addition to text messaging, users can send each other images, videos, and audio media messages as well as their location using integrated mapping features. Competing with a number of Asian-based messaging services (including LINE, KakaoTalk, WeChat), WhatsApp has over 450 million monthly active users around the world, and has been adding a million users daily. According to the Financial Times, WhatsApp “has done to SMS on mobile phones what Skype did to international calling on landlines.”
Essentially, this application allows users to communicate between all different types of mobile phones on all different carriers, world-wide. All you need to do is enter your phone number and WhatsApp “looks” through your contact list for other people who are using the app. Then you can message those users all you want without limits or overage charges. The technology behind WhatsApp is not very complicated or even that proprietary; the application allows for Multimedia messages (an image, audio or video) to be sent to an HTTP server and then a link to the content along with its Base64 encoded thumbnail is sent to the contact indicated. In the simplest of terms, the user sending the information does so by sending the information to a web server via the mobile app. The designated user(s) receive the message in the form of a link on the same mobile app. The app is free to download and has no ads, but it costs $1 per year after the first year.
WhatsApp allows for the circumvention of regular SMS messaging which basically exploits a “loophole” in mobile phone carrier pricing. Additionally and maybe even as importantly, WhatsApp is a stark reminder of how much money phone carriers are losing out on as competitors let users text and chat at no charge. According to research done by Ovum Ltd, free social-messaging applications like WhatsApp cost phone providers around the world $32.5 billion in texting fees in 2013. That figure is projected to reach $54 billion by 2016. As more customers switch to smartphones with increased and better Internet access, people are relying more on applications such as WhatsApp to communicate. This is particularly true in areas outside the United States where carriers do not include unlimited texting into voice and data plans. The rise of these Instant-Messaging applications has offered a cheaper source of communication, especially between users located in different countries, and they are undercutting the texts that, up to now, had been a key source of income.
Why the Acquisition?
According to Mark Zuckerburg, Facebook acquired WhatsApp because it wants to, “make the world more open and connected.” But, did Facebook really acquire WhatsApp because it wants to enter the mobile phone market? (This reason has been suggested with other acquisitions). J.P. Morgan analyst, Doug Anmuth said, “Facebook’s acquisition of WhatsApp gives the company a strong position in mobile messaging, which we think is a crucial part of the company’s core mission of connecting the world.” Still, others speculate that Facebook wants to expand their global social media footprint. As TechCrunch’s Josh Constine notes, “WhatsApp is huge in developing countries. Facebook could also use WhatsApp to help bring more people online through subsidized Internet, which Facebook already offers in some countries. The acquisition is a shortcut to owning those growing markets.” Others believe that Facebook wants to corner the photo sharing market. With a user base of 450 million (compared to 1.23 billion for Facebook), WhatsApp users send 500 million pictures back and forth per day, about 150 million more than Facebook users generate. Maybe Facebook is weeding out the competition as it has did with Instagram while blocking any future deals with other rivals like Twitter.
What is certain is WhatsApp will provide mountain loads of data about the things that people world-wide are truly interested in; information which, until the acquisition, Facebook didn’t have access to. This new data can then be used for targeted advertising on other Facebook properties.
Facebook’s acquisition of WhatsApp is definitely setting precedence in the acquiring of newly formed user-based start-up companies. Using an “evaluation” process of the firm (number of users that currently use the application, combined with the potential income that may be derived from advertising to the user base, or from an increase in the cost of the app, or the possibility of adding additional revenue based services) instead of structuring an offer based on actual revenue (WhatsApp declined to comment on their sales figures) has stirred up the financial world.
With a rapidly developing coding community taking off in South Carolina, this news is both thrilling and exciting! I know I am encouraged! I am a serial entrepreneur with two established businesses in the Upstate, and beginning a third – a new social application called SocialSprig. It is my dream, and the dream of many entrepreneurs like me, who hope that our startups ultimately have a higher evaluation than XEROX, Marriott, and American Airlines.