Was the WhatsApp buy expensive?

When Facebook CEO Mark Zuckerberg told analysts in a call that he doesn’t intend to monetise WhatsApp till the mobile messaging company attains a scale of well over a billion users, it became clear that the number of customers was his top priority.

But in making a $19-billion offer for the acquisition, has he overpaid? Though there may be no definitive answer to this, the acquisition does appear costly going by some past transactions in the technology apps space. WhatsApp’s revenue base is also lower than peers such as Wechat.

For starters, there are reports which suggest that WhatsApp’s revenue in 2013 was around $20 million. This means that Facebook is paying as much as 950 times WhatsApp’s annual revenue.

The messaging company also does not have an advertising revenue stream as its messages are free from ads. Its peer, the China-based Wechat, is estimated to have ended up with a revenue of $1.1 billion last year, and it has advertising as well as gaming options in its messaging services. Its subscriber base, according to reports, is around 300 million.

But WhatsApp does have a subscription model, where users pay close to $1 after the first year. If the current subscriber base of around 450 million begins to pay for the service, that would translate to $450 million in annual revenue. The valuation multiples then tend to look lower at 42 times sales.

So, the revenue per user for WhatsApp is potentially $1 (given that the subscription stream may not yet have started), while it is nearly $3.7 for Wechat.

These numbers alone may not be enough to pronounce the acquisition as expensive. But comparison with acquisitions such as that of Instagram and Viber point to an expensive buy. The online photo- and video-sharing service Instagram was acquired by Facebook for $1 billion in 2012, when the former had 33 million subscribers. That amounts to a ‘valuation’ of around $30 per user. But it now has over 150 million registered users.

Viber, which allows free international calling through a mobile app, was sold for $900 million and had a user base of 300 million. This makes it just $3 per user as the cost of acquisition.

In the case of WhatsApp, the per user cost would be $42. Another report suggests that Snapchat, a photo messaging app, is valued at $50 on a per user basis and had supposedly turned down a $3-billion offer from Facebook. Twitter trades at $140 per user and Facebook at $147 per user.

Going back to the earlier point about scale, WhatsApp reportedly adds a million users every day. If this rate continues, it should be able to hit the one-billion subscriber mark by the second half of 2015 and the smartphone market is a 6-billion user opportunity.

When both Facebook and WhatsApp have over a billion users, then all possible revenue streams can be opened up, including advertisements. If its subscription model clicks, WhatsApp can generate $1 billion in annual revenues by as early as the middle of next year.

With a strong growth markets such as India, Mexico and Brazil, parts of south Asia and entrenched presence in western Europe and the US, adding customers may not be as much of a challenge as will the task of monetising its base. It is also important to note that WhatsApp has less than 50 people working for it. That means an extremely nimble company with very little to worry about overhead costs.

Recent reports suggest that Facebook is losing users to instant messaging players and social media companies have probably led the network to make an aggressive bid to keep users within its fold and offer them interesting alternatives.