If WhatsApp Is Worth $19 Billion, Then Facebook Isn't Worth $173 Billion

| About: Facebook (FB)
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I'm no expert on tech, nor do I claim to be one, but Facebook's (NASDAQ:FB) acquisition of WhatsApp rang alarm bells at a more abstract level. This isn't just about mobile and tablets, but the fact that a company with only a few million dollars in funding and 50 people could offer a product to hundreds of millions for $1/year and get bought for $19 billion. To me, this poses a serious question as to how much Facebook is really worth.

The New Exit Strategy: Get Bought by Facebook

At a more macro level, the WhatsApps and Facebooks of the world pursue two different strategies: the WhatsApps are small and have more to gain by focusing on increasing users, while the Facebooks are big already and have more to gain by monetizing their users. The characteristics of the internet economy mean the WhatsApps can increase users with very little input. There's no need to build additional factories, set up distribution channels, maintain a national advertisement presence, etc. There might not even be a need to hire more people. A few entrepreneurs, a few dozen programmers and a few million dollars are all that is needed to build a business that challenges Facebook.

The buyout of WhatsApp may send a dangerous signal to entrepreneurs in the SNS field: focus on a great experience, don't try to monetize too much, and keep costs near zero. If you get enough users, you'll be bought out for a much bigger sum than you could've ever made focusing on profits alone.

If this is taken to its logical extreme, startups will provide such instant messaging/social networking services for *free* in a bid to gain users. Since overhead is pretty low (as evidenced by WhatsApp's few dozen employees and zero ad budget), a few million dollars in funding can go a long way. In the end, these startups wouldn't even have to earn a profit to prove their value; all they need to do is to pose a big enough threat to Facebook to get bought for an astronomical sum. Other than startups and venture capital firms, any big tech player that wants leverage against Facebook would have an incentive to fund these apps for a few million dollars a year as well. This can ensure an endless potential supply of WhatsApps.

Survival Not Synergy

Social networking has gotten to the point where new applications are cannibalizing others. You don't need a dozen apps to send messages to your buddies. Assuming the time spent on SNS has pretty much reached a constant value, if you pay more attention to WhatsApp, then you're paying less attention to Facebook. Buying WhatsApp doesn't "add value" to the Facebook franchise, it's more about protecting its dominance. At some point, investors are going to wonder: how many more WhatsApps does Facebook need to buy? That's an uncertainty that is really difficult to gauge. If Facebook buys out another 5 WhatsApps, then it'll need to give away almost half the empire just to maintain the status quo.

Even if Facebook buys off all these competitors, what is it going to do with them? Is Facebook going to start monetizing WhatsApp? If it does, it'll reduce the appeal of WhatsApp and countless other free, non-hassle apps will pop up to siphon off its users. If it doesn't, then what's the point of the buyout? Sure, the Visigoths just swore fealty to the Roman Emperor (for a tenth of the empire), but they're still doing as they please and contribute no revenue to the empire. An even worse scenario would be Facebook users migrating to WhatsApp. Facebook would face the dilemma of either losing the base which it can monetize or sabotaging the non-hassle integrity of WhatsApp, creating a vacuum for countless other non-hassle apps to popup and pretty much making the $19 billion buyout a waste of money.


WhatsApp may be just one of the first headaches Facebook will have to face. Essentially, this is driven by the peculiar industry economics of social networking services. Compared to Ford (NYSE:F), AT&T (NYSE:T) or even Amazon (NASDAQ:AMZN), the cost to build and maintain a 400-million-user service is small (almost 0, in the case of WhatsApp). Compared to Heinz ketchup or Coca-Cola (NYSE:KO), there's a much smaller emotional connection between customer and product. Fifteen years ago, you chatted on AIM. Then you chatted on MSN or Skype. Now I chat on whichever app is the least hassle and is recommended by friends.

Compared to TripAdvisor (NASDAQ:TRIP), previous Wall posts are usually worthless after a certain period of time, and few people sign up to peruse the Wall posts from a few years ago. Without all the other barriers to entry, the network effect both works for Facebook and against it as it struggles to preserve its dominance and monetize its business. While I wouldn't short FB, I'm seriously doubting the long-term value of the business.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.