Facebook’s offer price for WhatsApp, USD 19 million, has been the source of considerable excitement and debate. We jump into the fray with some early thoughts on possible signals and reservations of which tech and app developer communities worldwide should be mindful.
On Wednesday, 19 February, shockwaves went through the global tech community by an announcement that social networking giant, Facebook, would be purchasing WhatsApp, an instant messaging smartphone application (app) for USD 19 billion (a combination of cash and stocks paid over four years). Released in 2009, WhatsApp’s proprietary cross-platform service had a subscriber base of 450 million as at December 2013, and is reportedly growing by 1 million subscribers per day (Source: Wall Street Journal). It is also the fifth most downloaded app on the Android platform, and as reported last week, was among the top five most downloaded free apps in the Caribbean.
Facebook is one of the world’s largest social network. In January 2014, the network had over 1.23 billion users and had a market capitalisation of USD 158 billion (Source: Forbes). Interestingly, it also means that Facebook’s is prepared to give up almost a tenth of its value to acquire WhatsApp.
What signals might the sale price send to the industry?
With just two day passed since the purchase announcement, analysts are still grappling with the situation. For example there has been wide debate over whether Facebook has over- or underpaid for WhatsApp. However, the question that must also be asked is whether such an offer price for a single messaging app could be the start of tech bubble … of sorts.
Although a true tech bubble might not eventuate, it is likely that on the heels of Facebook’s offer for WhatsApp, the visibility and value of other existing messaging apps will increase considerably. Further, we may also see numerous copycat messaging apps being released, all trying to replicate ‘the WhatsApp experience’.
Yesterday, the day following the announcement, there has already been some evidence of the impact of the Facebook-WhatsApp acquisition. First, BlackBerry’s stock rose by 4.3%, which analysts suggested indicates a change in the perceived value of the company’s messaging service, BlackBerry Messenger (Source: MarketWatch). Additionally, it was announced yesterday that Viber, another cross-platform instant messaging service with 300 million subscribers, has been purchased by Japanese e-commerce giant Rakuten Inc. for USD 900 million (Source: Reuters), though that transaction might have been concluded some time ago. However, it is likely that Viber’s value to Rakuten might be considerably more as of 20 February, than it was on 18 February.
On a separate note, much has been made – by Facebook and analysts alike – about the fact that WhatsApp and has been profitable for its owners without having to rely on advertising to generate revenue. In other words, the app does not include any advertisements whatsoever. Among free apps, the sale of advertisements is frequently critical to their business models and a key income stream. However, the fact that WhatsApp has been able to enjoy the success that it has without advertisements, might encourage developers to consider other business models that do not rely as heavily on advertisements for income.
Under the euphoria, is there still cause for reservation?
The sale and acquisition of these messaging services is likely to invigorate app developer communities worldwide with the hope of striking it rich. However, it must be emphasised that the majority of developers struggle to breakeven. According to surveys with app developers conducted by App Promo in 2012 and 2013, and analysis conducted by CB Insights in 2013 of 1 million apps in the Apple iTunes App Store across 23 primary genres in 155 countries:
- an app in the iTunes App Store that gets into the Top 1000 only spends, on average, 23 days in that listing
- 80% of survey participants confirmed that they did not generate enough revenue to support a standalone business
- 68% of them earned USD 5,000 or less on their most successful app
- 66% of them also admitted that they do not have a marketing budget
- 69% of their apps did not generate enough revenue to break even on their development costs, and
- among new developers their apps generally had a lifespan of around six months, whilst apps that have been around for a while (at least three years) had a greater chance of became more financially successful.
In summary, although the above survey findings would have been deduced from relatively sample groups, they do begin to highlight the fact that WhatsApp, like most highly successful apps, are the exception, not the norm. Additionally, success may take time. Hence it is advisable that an app’s support team (development, finance marketing, etc.) are sufficiently resourced for the long haul, and even then, success is not guaranteed.
Image credits: Facebook and Apple iTunes
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The case of “if you can’t join them, buy them”, then decide later what to do with them.
On the other hand, the failure rate statistics cited, in my view, are consistent with business startups everywhere. Statistics show that, generally 1 in 3 business startups fail in the first 1 year. 1 in 2 fail in the second year and so on. Compounding these, we can see that the startup app failure rate is not characteristically dissimilar.
The points on “signals the sale price is sending to the industry”, are very pertinent. If the underlying business, even with asymmetric support from the acquiring parent company, does not generate sufficient revenues to support ROI, then we are witnessing a “bubble” in the making.
I actually think the deal to buy WhatsApp is a pretty shrewd one. $4 billion in cash and $15 billion in stock is not as extravagant as it may seem. And given that you’re immediately adding 450 million users as potential targets for advertisement, cross selling and other targeted marketing. Moreover, it automatically gives Facebook an entrenched presence in mobile messaging that its own mobile app could not achieve. Let’s not talk about the intrinsic value of mining the data of all these new customers.
Insightful Niel. Thanks.