I Do Not Understand

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Joshua Gans attempts to explain WhatsApp, the small text messaging service that was acquired by Facebook for a combination of cash and stock reported as $19 billion. He writes,

WhatsApp experimented with various paid models from a paid up to a paid subscription to its now, try before you buy, option. Basically, after a year you pay $1 per year. It is dead simple and quite lovely. There are no gimmicks there either. You have to initialise the paid version. It doesn’t just kick in. There is something so refreshing in a service that just gets people to pay for it if it is worth something to them rather than exploit some failing in their rationality.

Among the things I do not understand.

1. I agree that the business model is refreshing. But I think that in this case it is also self-extinguishing. The service has value to people who are otherwise charged for sending text messages. As more people adopt the service, cell phone companies will obtain less revenue from charging for text messages. The end game is for them to obtain revenue in other ways and drop the charges for text messages (a lot of us in the U.S. already have plans with unlimited text messaging). At that point, the rationale for paying even $1 a year to WhatsApp will have evaporated.

2. I do not understand why, in a bidding war between Google and Facebook, if Google bids $10 billion, Facebook has to pay $19 billion. I would think that the minimum raise in this game would be a little smaller.

3. Reihan Salam reproduces some analysis by Tariq Krim that indicates that WhatsApp has a faster-growing user base than Twitter, which is valued by the market at $20 billion. (a) I think I understand what makes Twitter’s market advantage seem defensible, but I do not understand what is defensible about WhatsApp’s user base. (b) As an investor, I would not go anywhere near Twitter at its current valuation.

4. Reihan points to Ben Thompson, who writes breathlessly,

Still, it’s only recently that the killer app for this era, when the nodes of communication are smartphones, has become apparent, and it is messaging. While the home telephone enabled real-time communication, and the web passive communication, messaging enables constant communication. Conversations are never ending, and friends come and go at a pace dictated not by physicality, but rather by attention. And, given that we are all humans and crave human interaction and affection, we are more than happy to give massive amounts of attention to messaging, to those who matter most to us, and who are always there in our pockets and purses.

I do not understand why Thompson is so confident of this. I teach in a high school, so I think I have a bit of sense of what teenagers are up to these days. They are the natural market for this stuff, and a few students are really into messaging. There also are a few of them who are really into games. A few of them are really into music. And a lot of them are perfectly content to leave their phones in their pockets for the whole day.

Late in 1999, I started my first blog, which I called The Internet Bubble Monitor, to make fun of the stock valuations of that era. I shut it down about six months later, because there was nothing to make fun of any more. I think I might have to start it up again.

9 thoughts on “I Do Not Understand”

  2. Do recall that Google didn’t get a deal at $10B, and WhatsApp was not sold at auction. So the $9B spread might make more sense than first appears.

    But that one quibble doesn’t change the rest of the analysis….

    One befuddles me more is that none of these things are complicated technology, and if anybody has “network effects” and “brand and name recognition” to exploit for new services it would be google or facebook.

    Fortunately, it was not my money….

  4. The thing about texting is that actually is the killer app, all those kids who don’t look at their phone much are probably still getting texts.

    The problem for WhatsApp is what you already mentioned. It is that the cell phone providers already have that app, it is just a pricing dispute, and since they are providing the service either way, if they stop getting revenue for it why would they let somebody else?

  6. Note that SMS, and even traditional voice calls, are also under fire from chat programs such as Skype, Yahoo IM, Google Talk. The one and only thing that traditional phone service has is that everyone you might possibly want to communicate with is sure to have an old-fashioned numeric address from this system.

    This is a network effect, and network effects lead to unstable equillibria.

  7. No analysis of this deal is complete without reference to WeChat vs. Sina Weibo in China, which is very, very roughly analogous to WhatsApp vs Twitter in the US. WeChat is ‘winning’.

    Facebook is hoping that the same will happen here. They are paying a premium for magical transference.

  8. The answer to the question of, “Why did Facebook buy WhatsApp for so much money?” is the answer to another question, “Why was FB principally competing with Google, and how do Facebook and Google make their money by providing free social-networking services?”

    The answer is, “By extracting very valuable marketing information when they collect, indefinitely store (look for the stored-communications-act relevant portion of the EULA), database, and data-mine all those personal communications.” Network effects are both a demand-side externality and a supply-side benefit in this context.

    Your information, social interactions, and dedicated-attention is worth a lot. They’re intent on dominating as much of it as they can.

  9. The whole field will fall to some open source system like Twister that incorporates Bitcoin-style cryptography for verifying identity. That way you can possess your own identity across the internet and enable any kind of blogging or chat app you want, but with an ID that is totally your own. All the transaction data would be public as well, so data mining will be open to all.

    In other words, nobody is going to make money from it, not the cell providers, not Facebook or Twitter, nobody. But a lot will benefit.

    http://twister.net.co/

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