Two trends help explain the staggering amounts of money being exchanged for a 4-year old messaging app:
- NETWORK EFFECTS – The fact that WhatsApp was able to acquire 450m users in the space of 4 years is phenomenal and only became possible because of the extensive penetration of the smartphone (one in five people in the world own a smartphone today).
- AVAILABILITY OF CHEAP CASH IN THE TECH INDUSTRY – the likes of Google, Microsoft and Apple sitting on cash reserves in excess of $250Bn. Recent IPOs of Twitter and Facebook injected a lot of cash into the companies arming them with reserves to acquire potential competitors pre-emptively. This has exacerbated an arms race within the tech industry to acquire new startups that pose a threat to the incumbents even before they have actually generated any revenues (case in point: Instagram). Google is reported to have bid for WhatsApp in 2013 for $1Bn.
What does this say about the future? :
- EXPECT MORE INFLATED VALUATIONS– at $42 per user, Facebook values Whatsapp users much higher than the $0.99/year they generate in revenues. Instagram was valued at roughly $30 per user despite the fact that Instagram had no real revenues when it was acquired. But again, these acquisitions seem more like threat pre-emption than an investment in future value creation. In that regard, we can only expect competition to further intensify when the next cool app wants to get acquired.
- EVEN MORE INTEREST IN TECH ENTREPRENEURSHIP – Whatsapp acheived a higher valuation than that of many physical companies with just 32 engineers. The ability to scale an app to serve 450m+ users with such a small team has been possible because of the availability of cloud computing. This acquisition is certain to make the size of a company even more irrelevant and to give a fillip to the startup community.
- INCREASED BACKLASH AGAINST THE INEQUALITIES CREATED BY THE TECH INDUSTRY – An upward trend of a globally intertwined audience combined with the penetration of smartphones and the internet, sets the background for an industry that allows power and money to concentrate in relatively few hands within a relatively short period of time. Though the tech industry is hardly viewed as a rent seeking one like the financial services industry today, there have been protests against the rapidly increasing affluence of tech workers as compared to workers in other industries. (case in point: Google buses in SF )