Yeah! I got a double spread in the Sunday Economic Times today!
Facebook-WhatsApp deal: Is paying Rs 1 lakh crore for a free app, a Masterstroke or a Maha Blunder?
Fanta Singh was informed that Facebook had acquired WhatsApp (the messaging app) for 16 billion ‘daulars’. Fanta Singh was hard of hearing and did not believe his ears. He asked his friend to repeat, which he did: Facebook was paying 1 lac crores to buy WhatsApp.
On hearing this, Fanta Singh began to laugh hysterically! Later he said, “Arre, what a bewakoof that Zuckerberg Paaji is! Does he have bhains buddhi (buffalo brains)? Why did he pay 1 lac crores for an app that is FREE?”
If you’ve had your laugh, let me also earn your respect.
A year ago, I was trying to get a peculiar sized table made. It was a square table that needed to be portable, light in weight and sturdy. After a couple of nerve-wracking sessions with my mom’s carpenter (who always has a 1 cm pencil stuck behind his ear), I was making no progress. The bidi-smelly fellow was trying to make a table that reminded me of the one used in Jesus’ Last Supper – whereas I wanted something that Steve Jobs would love me for. In the end, he said, “Alokbhai, don't worry. I will draw more pictures and send them to you by WhatsApp. You have WhatsApp naa?”
I was stunned.
Facebook’s 16 billion acquisition of WhatsApp is as spectacular as seeing a Star Wars Spaceship cruise by Marine Drive. It's a mind-numbing, brain-quashing, and cardio-inflaming deal. Now, for the records, I maintain the deal price at US$ 16 Billion since I am not accounting for the US$ 3 billion RSUs (restrictive stock options) that WhatsApp employees will further receive from Facebook. That part always has a lot of ‘ifs and buts’.
So, is this deal a Masterstoke or Maha Blunder by Facebook?
Let me present my thoughts from both perspectives:
The War over a Nation
When Facebook closed the deal, WhatsApp had 450 million monthly users and was adding 1 million users a day! This places WhatsApp as the 3rd largest country in the world and if it continues to grow at the same pace, it will become the largest country in the world!
Now tell me, is US$ 16 billion too expensive to own the world’s largest country-in-the-making?
The biggest shocker in the deal announcement was the revelation that 70% of WhatsApp installed customers use the app every day! That's 300 million people or the equivalent of the entire population of the USA daily marking attendance!
If I were to tell you that you could have control over this digital population, would you even bother negotiating a price? Would owning a nationality of citizens that have traditionally been the toughest to recruit, famous for being disloyal, fickle, inattentive and mostly inert, be temptation for anyone to resist?
World War I and II were fought by nations to control each other. World War III has begun. Only this time it is companies fighting over digital countries.
Masterstroke – when you have the opportunity to own the world’s largest digital country, you don't care about price.
The Price of Paranoia
Steve Case is probably the greatest salesman ever born. He took his puny America Online Corporation (AOL) and sold it at an obnoxious, dizzying and spine-chilling price of US$ 160 Billion to the all and mighty Time Warner Corporation in the year 2000.
What was Steve Case selling and Time Warner buying?
Pure, unadulterated, untouched PARANOIA.
At the height of the dot com bust, big media entities of the world such as Time Warner began to feel like cave people who had been transported via a time machine to the 21st century. They could not understand what the W in www meant and how websites were changing the way people were consuming media. The felt ‘compromised’ in their understanding of their very own business, that they were experts in.
They succumbed to paranoia and paid a mighty price for it! Till date, the Time Warne-AOL deal is unanimously considered to be the worst deal of human history.
Mark Zuckerberg revealed his paranoia when he publicly announced that, “WhatsApp is the only business in the world that had better retention and usage than Facebook.”
Like Time Warner, Facebook has not understood what to do on all things mobile. It feels helpless and therefore makes wild, bold buys like Instagram (1 billion) WhatsApp (16 Billion), while failing to buy Snapchat for US$ 3 billion.
Andy Grove of Intel famously said, “Only the Paranoid Survive.”
Yeah. We know who supplies them the drugs!
Maha Blunder – To pay an irrational, insane and obnoxious price to treat your paranoia that might not be true in the first place!
Playing Man in the Mirror?
For almost 10 years, I practiced a rustic, medieval form of Japanese meditation, which included praying in front of a God figure, placed in the middle of a beautiful ornate wooden shrine.
Only that the God figure was a circular mirror.
It took me a decade to understand that the mirror was to simply reflect myself and make me realize that to discover God, I had to first discover myself.
I think when Mark Zuckerberg sees the founder of WhatsApp Jan Koum, he sees himself.
Why do I say this?
Both these gentleman have a huge disdain for making money by advertising. Unfortunately, Mark Zuckerberg crumbled to Wall Street pressure to show increasing revenues and spray his beloved Facebook with ads, whereas Mr. Koum and his company WhatsApp, got away by being ad-free.
For years Mark Zuckerberg said, “No ads on Facebook.” In the infamous movie ‘The Social Network’, his character avoids falling for Madison Avenue advertising revenue overtures that his now estranged co-founder was trying to garner.
Mr. Koum of WhatsApp on the other hand, is very vocal about not having advertising as a revenue source. If you sign up for WhatsApp as a first time user, you will be treated to a “declaration of independence” – a long mobile page that berates advertising and its evils; and how the founders of WhatsApp vow never to pollute their beautiful products by ads.
Grump! So much for saying no to easy money!
Increasingly, Google and Facebook are facing a tough task to maintain growth in digital advertising, as users migrate to using mobile devices where ad space is a constraint. Google is too far down the line to change its business model fundamentally. But Facebook is still young and can try.
Mark Zuckerberg evidently relates to Jan Koum because he has actually asked him to sit on the board of Facebook when the deal closes. Koum too, did not pursue a similar deal with Google because he found a better ‘fit’ with Zuckerberg.
Both these guys will do something that will generate revenue from stuff other than ads. That's why they have joined themselves at the hip.
Masterstroke – When you meet your clone who is doing what you want to do, then how do you get him onboard? By making him an indecent proposal!
It’s all about dhandha now.
Where do you keep your most precious jewels? In your mother-in-law’s bank locker? Or under the mattress in the guest room?
You may not be aware, but your most precious jewels are hidden in your mobile phone. They are your mobile phone contacts, collectively known as your address book.
One of WhatsApp’s co-founders had scribbled a poster of his vision of his company that has now gone viral. (Note to yourself – scribble something silly and hang it publicly; if you get famous, then that paper will provide good PR value).
That poster reads, “No Ads, No Games, No Gimmicks.”
But lots of people still don't get it. Dear Mr. Koum, people want to know that if all this is bunk, then what is going to make you money?
It's the address book, silly!
Think of these cases with the combined entities of Facebook and WhatsApp: When chatting with a friend on WhatsApp, you will be able to instantly buy and send her flowers or chocolates once a small feature called Gifts appears as a tab. (Remember, only ads and games are not allowed.) Since Facebook has everyone’s birthday, you will be prompted to wish and send gifts to friends on special days. The ‘integration’ of messaging and commerce or “messa-commerce” will create massive opportunities for Facebook to earn revenues from trade commissions. I foresee shopping, travel, cars and cakes – all to be listed on WhatsApp as an offering to their combined consumers.
“Dhandha” (business) happens when people talk and exchange information. Now that's exactly what WhatsApp does!
Masterstroke – All businesses have to migrate to newer revenue models. If WhatsApp seems to be the logical next step for Facebook, then why hold back?
If you wrong me, shall I not revenge?
Shylock says a variation of this to Antonio in ‘The Merchant of Venice’. Further, he loans him money and writes out a contract purely based on revenge, not business. Shylock doesn't want Antonio to stay in business just because he doesn't like him.
In the tech-world too, there are similar, bizarre cases and clashes.
Apple’s iPhones always used Google Maps. But after the fallout between the two parties (blame renewal terms for using maps; the deteriorating relationship between the two companies), Apple kicked out Google Maps as the default map software when it launched its new iOS 6 software in Sept. 2012 and replaced it with its own maps.
The result was a disaster. Consumers (me included) hated the badly mapped, erroneous Apple maps and gave a black eye via negative PR and consumer wrath. Later on, Google Maps appeared as an app and we all use that today.
Apple took cold revenge and did not even care about its consumers when it acted.
In the same way, how can Zuckerberg and Koum be sure of future reactions of Apple and Google towards their arranged marriage? What happens if Apple and Google disallow the WhatsApp from being downloaded from their app stores just ‘to take revenge’?
Another dangerous angle is that while Facebook is banned in China, WhatsApp is not. Now, with this new relationship, will WhatsApp be banned too?
William Congreve (not Shakespeare) wrote in one of his plays, “Hell hath no fury like a woman scorned.” In today’s age, we could say, “Business hath no future like competitors scorned.”
Maha Blunder – Facebook’s and WhatsApp’s naivety and assumption that their competitors will play normal. No one does. Not even in good times.
So, what do yo think? What was this deal?
Added on 25-2-2014:
Check out the leverage of 'messa-commerce' as written about in the ET today!
very well thought and written post - kudos to you.
I wrote on this topic in last October and failed to predict this possibility.
Though, at the outset, $16B price seemed irrational and very high, a quick comparison to Twitter (which btw is not doing that great in terms of engagement) reveals why it makes sense. For people who know valuations are based on future potential/expected cash flows, it kind of makes sense when one gets into numbers. WhatsApp has a lot of potential, it needs to be seen if fb+WhatsApp can unleash that. Here's my analysis for the analytical and "rational".
Nice. I like it when rodinhoods create tables to explain :))
Sigh. Reminds me of an app we worked on - PhonOn (prompting users to wish friends for their birthday was one of the most loved features by the users).
Anyway, I think there is one time Whatsapp succumbed and went "gimmicky" - when they introduced voice messaging last year. It was just a counter move when WeChat and LINE started their global marketing push. The feature wasn't well thought out or well executed.
Wrote last year on why it wouldn't be a good fit for Google: http://srikrishnan.me/post/47557523654/googles-whatsapp-bid-real-or...
Know some users who don't buy a phone if it doesn't support Whatsapp (they don't know about Android or Windows OS). So If Google doesn't support Whatsapp they will simply move to Windows OS. But had to wait & see how users will get irritated when Whatsapp starts ads
Everyone should read and watch this - http://www.businessinsider.com/facebook-fake-like-video-2014-2 http://www.youtube.com/watch?v=oVfHeWTKjag#t=506 Facebook is generating significant revenue using very dubious means. I'd go as far as to say it's one big class action lawsuit waiting to happen. I have experienced this first hand.
This is a very interesting take on the numbers behind the acquisition by renowned valuation and Finance professor Damodaran http://aswathdamodaran.blogspot.com/2014/02/facebook-buys-whatsapp-...
The only thing that explains this acquisition to my mind is technology. Its probable Zuckerberg might have access to certain new technologies which might do any of the following
Or something like that. Maybe other Rodinhooders could come with better ideas.
that's lateral thinking but well thought through..! I shared it immediately (after reading first two paragraphs) before I read the whole article!
Just curious... how on earth did you get this idea (leave alone the topic name!)
Simply awesome - A master stroke.......Pl keep writing more.