How is a US start-up technology company, which employs 50 people but has 450 million users of its global messaging application, worth $19 billion (€13.9 billion)? That is the question Facebook, the world's largest social media network, has just answered. Facebook has agreed to pay that amount to buy WhatsApp, a world leader in mobile messaging. WhatsApp allows the users of its programme to exchange photos and videos and to chat at little cost. Most people will, however, struggle to understand how a company that generates so little revenue – the programme carries no ads and its users have free access for a year – could be valued so highly. Facebook is paying over twice its annual revenue to buy a start-up company with minimal revenue. This represents, it would seem, a great act of financial faith in WhatsApp's future earnings potential. Facebook nevertheless thinks it has secured a bargain, and the financial markets agree – as the rise in its share price demonstrated.
For Facebook, the challenge to stay ahead means buying those companies that can best protect its dominant market position in social media, and that can accelerate its growth. WhatsApp, which has half as many customers as Facebook and is growing faster, had obvious appeal. Growth by acquisition of other social apps enables Facebook to broaden its appeal, increase its range of offerings, and thereby attract more new users as customers. WhatsApp’s attraction to Facebook is the age profile and location of its users, who are younger, and live in greater number outside the US.
WhatsApp's financial transformation, from rags to overnight riches, has become a familiar feature of the world of digital technology. However, great wealth for the two founders of the five-year-old company, Jan Koum and Brian Acton, was never part of their grand design. Indeed the duo's success is a novel case study for business schools, given their unorthodox approach. They refused advertising to boost company revenue, and offered users virtual free access the service. And both kept a low public profile and shunned publicity in a world where self-promotion and company promotion is regarded as critical to business success. As Mr Koum, who has earned an estimated $6.7 billion from the sale, once tweeted: " People starting companies for a quick sale are a disgrace".
Nevertheless the key to financial success with social media lies in the ability to monetise the application, and to turn loss into profit. But to retain the loyalty of a large audience while developing a strong revenue stream, whether by levying charges or by selling advertising, has proved a formidable challenge. For a company with an anti-advertising, anti-gimmicks and anti-games philosophy, that balancing act could yet prove hard to achieve.
