Facebook and WhatsApp – What’s a Consumer Network Worth?

Posted on: December 4, 2012
Posted in Mobile, Social

The exercise below is meant to draw a representation between the WhatsApp network and the value a potential suitor, including Facebook, would agree to pay. According to TechCrunch, WhatsApp has tens of millions of daily active users, the vast majority 1 to 1 messages between 2 people, not group messages.

But these numbers are approximations, as WhatsApp has historically been silent about users. The most revealing numbers came in August when the company declared it was delivering 10 billion daily messages. Backing this off into daily active users at an approximation of 100 messages per active user per day, we arrive at 100M daily actives. And if users were (on average) sending 50 messages per day (lower engagement), you get to 200M daily active users (higher actives). These approximations are directionally (very) valuable as a valuation exercise for such a massive consumer network.

But one of the real questions to ask when a consumer service reaches scale is: what will the future lifetime value of those users be? Early in in the lifecycle of a consumer network, the value is placed more on the upside potential for growth and the outside chance of market disruption. It’s an option. WhatsApp is passed that stage and can now be valued based on network size and usage. At the time of IPO Facebook was clearly massive, but was only generating about $4 of revenue per user per year, and virtually none of this was mobile, despite hundreds of millions of mobile users.

In the case of WhatsApp, as many as 100M people open the app 100 times a day. There is a usually a power law distribution on messaging apps since young users skew usage orders of magnitude beyond the average, but you get a flavor for the engaged user. Mobile chat / messaging apps have high engagement by the simple fact that incoming messages are almost universally opened and read within minutes of leaving the senders phone—active users open these apps dozens of times per day.

Relating users to possible acquisition values would flow as follows: divide acquisition price by active users, resulting in future revenue required per active user to break even. e.g. FB could say “What lifetime revenue do I need to generate per each of the 100M daily active users if I want to break even paying $1B for WhatsApp?” That equates to $10 of revenue generated for each active WhatsApp user.

So it’s clear this calculation simplifies a net-present-value of the network, and messengers are historically tough to monetize. But it’s something that Facebook can do somewhat deterministically because from a mobile product lens standpoint, FB is building monetization-focused products (ads and commerce) which could be well utilized inside WhatsApp’s network.

One other comparison for FB around a WhatsApp acquisition is Instagram. At acquisition, Instagram had about 25M registered users. Yes, they skyrocketed to 100M within 4 months, but were much smaller when the deal was struck. This 25M user number would surely be used as a market comparable in acquisition talks.

WhatsApp has not released registered user numbers, but if we use a 30/10/10 approximation we can eyeball that WhatsApp could have a network 10-20x larger than Instagram’s when acquired. Again these are not apples-to-apples comparisons, but we’re in unchartered territory with network comps at this size, and this is a useful exercise to determine the lifetime value of mobile-first consumer networks. You can safely assume that a deal will not get done south of $1B dollars. Market comps from Instagram help set a floor for the minimum price that WhatsApp would accept. My guess is $1.2 – 2B if a deal is struck within the next 6 months.

And of course the FB acquisition rumors may be wrong, just as they were with Opera several months back. But assuming there is interest from FB, the last remaining piece that would impact deal economics is bidding competition (remember that Twitter had massive interest in Instagram, causing Facebook to move fast). Multiple bidders may not emerge because communication / messaging networks are inherently fragmented, and it’s unclear whether the other large publicly-traded consumer tech companies would desire this network, or are far enough along with mobile-focused monetization products to value the network on a “product-lens” basis.

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