12 December 2018

Taking WhatsApp at more than Facebook value

There was no other deal to touch it for the week. On Wednesday, Facebook announced it was paying US$19 billion for smartphone messaging service WhatsApp in a deal that prices each user at around US$42.20. The Hong Kong Economic Journal’s investor diary took a look at how it stacks up.

For blogger Feng Wen, the value of the WhatsApp deal is not an issue of revenue and profit, but about securing a place on the global communication map. That, Feng says, translates into a whole new definition of value for Facebook.

But to Peter “Dr Doom” Schiff, founder of Euro Pacific Capital, there are two clouds over the chat app’s high valuation.

First, he says, WhatsApp has replaced SMS, taking away a huge chunk of sales and earnings from telecommunication operators. Yet, WhatsApp is not raking it in. It charges just 99 US cents per year for each user — very little given the costly services it displaced. WhatsApp has almost given itself away in the quest for rapid growth, expanding even more quickly than Facebook. But those users could leave just as quickly if the fees go up.

Second, Schiff says, telecom operators sell text services on an a la carte basis. If they switch to bundling the feature with data and voice, texts will seem free and Facebook will have to take on telecom giants such as AT&T and Verizon to dominate the market.

Schiff is correct when he says that WhatsApp has very little room to raise charges, but the column argues that Schiff’s second point is wrong, since user experience is far better in the case of WhatsApp. For example, the telcos aren’t competitive on photo download speed and no change in pricing strategy will address this fatal weakness.

WhatsApp’s real risk lies in being replaced by other similar services. According to US venture capital fund Y Combinator, Snapchat is more popular than WhatsApp among younger people and was approached by Facebook a year ago about a deal, a move that says a lot about Snapchat’s broader appeal.

It may not be enough for WhatsApp to rely on younger users and a token charge to drive its user growth. Although WhatsApp has 450 million active accounts, many of them could be ones that Facebook already has. 

At 51, Schiff, may have lost touch with the new generation and the new economy. But he has survived numerous market and economic cycles, and his views still offer valuable insight. A quick look at the last IT boom’s superstars shows how much leading lights can dim. Cisco Systems (CSCO.US), JDS Uniphase (JDSU.US) and Alcatel-Lucent (ALU.US) all trade today at a fraction of their record highs at the turn of the century.

Fingers crossed that the vast sum paid for WhatsApp reflects some kind of reality and that the tech sector’s prospects are not just another mirage.

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Freelance journalist

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