Skip to main content
Part of complete coverage on

WhatsApp is well worth $19 billion

By Michael Wolf
February 24, 2014 -- Updated 1924 GMT (0324 HKT)
STORY HIGHLIGHTS
  • Facebook bought WhatsApp, a mobile messaging service, for $19 billion
  • Michael Wolf: Yes, the acquisition is worth the money, even though company is young
  • He says WhatsApp's 450 million active users make it attractive in terms of growth
  • Wolf: Facebook is showing that it is willing to disrupt itself and remain relevant

Editor's note: Michael Wolf is chief analyst for NextMarket Insights, a technology market research company, and host of the NextMarket Podcast. Follow him on Twitter: @michaelwolf

(CNN) -- One of this week's most astounding stories is Facebook's acquisition of WhatsApp, a mobile messaging service that has more than 450 million monthly active users globally. The $19 billion that Facebook will spend on buying WhatsApp created a collective jaw-drop in the tech world.

Sure, the price tag is getting a lot of buzz -- $19 billion is a historically big number for a venture funded company. But what exactly is Facebook getting out of it?

A company just a few years old with less than a billion dollars in revenue and a service that is nearly (but not quite) free.

Michael Wolf
Michael Wolf

Is all of that worth so much money?

Just as with the acquisition of YouTube by Google for $1.65 billion or Facebook's purchase of Instagram for $1 billion, many people simply have a hard time wrapping their mind around an acquisition of a service that doesn't fit with traditional valuation principles.

In the old world, company valuations were based on a multiple of revenue or free cash flow, while also factoring growth over time. But in the new world of Internet and social media, revenue is often something that will come later as the result of hyper growth, and traditional valuation techniques don't apply.

Analyst: WhatsApp turned down Google
Silicon Valley gold rush
Why did Facebook buy WhatsApp?
From food stamps to billionaire

Still, because of the eye-popping price, many are naturally asking if this acquisition is a sign of a tech bubble. After all, prices for social media and Internet service startups seem to be getting bigger by the day and, well, $19 billion is a mind-blowing number.

To which I would say that while the price seems enormous - mainly because it is - the price per user is actually in line with acquisitions in the past decade.

When looking at price-per-user from acquisitions over the past decade and throwing out outliers like Yahoo's acquisition of Broadcast.com for nearly $11,000 per user (nice job, Mark Cuban), what Facebook paid for each WhatsApp user is solidly in the middle of the pack at $42, above Instagram's $28 cost per user and Tumblr's $33 per user, but below the $48 or so Google paid for each YouTube user back in 2006.

So while other acquisitions have been much cheaper in total price paid by Facebook, that's because the total user base of these other services has been much lower.

And that's the thing that makes WhatsApp such an attractive prize for Facebook: 450 million active users. Not only is that a massive number, but the number is also growing very quickly, having doubled in just the past year.

In short, with this acquisition, Facebook is getting the most popular mobile social messaging app in the whole world.

The importance of this can't be understated. Facebook has been trying over the past few years to adapt to the mobile world with mixed results, and now with WhatsApp, Mark Zuckerberg is not only getting a massively popular mobile social messaging service, but one that is also enormously popular in emerging markets.

As others have aptly noted, because Facebook doesn't control a mobile platform itself (unlike Google with Android), and with its stock rising, Zuckerberg likely felt it had to make this move now to add fuel to its transition to the world of mobile computing. If Facebook didn't make this move, Google, which reportedly offered $10 billlion for WhatsApp, likely would have.

Facebook is showing that it is willing to bet big chunks of the company (the WhatsApp acquisition will cost them roughly 10% of outstanding Facebook shares) to disrupt themselves and remain relevant.

A high price to be sure, but judging by recent history, the price it paid is about right.

Follow @CNNOpinion on Twitter

Join us at Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Michael Wolf.

ADVERTISEMENT
Part of complete coverage on
July 28, 2014 -- Updated 2245 GMT (0645 HKT)
LZ Granderson says the cyber-standing ovation given to Robyn Lawley, an Australian plus-size model who posted unretouched photos, shows how crazy Americans' notions of beauty have become
July 28, 2014 -- Updated 1156 GMT (1956 HKT)
A crisis like the Gaza conflict or the surge of immigrants can be an opportunity for a lame duck president, writes Julian Zelizer
July 26, 2014 -- Updated 1822 GMT (0222 HKT)
Carol Costello says the league's light punishment sent the message that it didn't consider domestic violence a serious offense
July 28, 2014 -- Updated 1251 GMT (2051 HKT)
Danny Cevallos says saggy pants aren't the kind of fashion statement protected by the First Amendment.
July 28, 2014 -- Updated 1852 GMT (0252 HKT)
Margaret Hoover says some GOP legislators support a state's right to allow same-sex marriage and the right of churches, synagogues and mosques not to perform the sacrament
July 28, 2014 -- Updated 1831 GMT (0231 HKT)
Megan McCracken and Jennifer Moreno say it's unacceptable for states to experiment with new execution procedures without full disclosure
July 28, 2014 -- Updated 1850 GMT (0250 HKT)
Priya Satia says today's drones for bombardment and surveillance have their roots in the deadly history of Western aerial control of the Middle East that began in World War One
July 28, 2014 -- Updated 1635 GMT (0035 HKT)
Jeff Yang says it's great to see the comics make an effort at diversifying the halls of justice
July 26, 2014 -- Updated 1555 GMT (2355 HKT)
Rick Francona says the reported artillery firing from Russian territory is a sign Vladimir Putin has escalated the Ukraine battle
July 27, 2014 -- Updated 1822 GMT (0222 HKT)
Paul Callan says the fact that appeals delay the death penalty doesn't make it an unconstitutional punishment, as one judge ruled
July 24, 2014 -- Updated 2225 GMT (0625 HKT)
Pilot Robert Mark says it's been tough for the airline industry after the plane crashes in Ukraine and Taiwan.
July 25, 2014 -- Updated 1510 GMT (2310 HKT)
Jennifer DeVoe laments efforts to end subsidies that allow working Americans to finally afford health insurance.
July 26, 2014 -- Updated 1533 GMT (2333 HKT)
Ruti Teitel says assigning a costly and humiliating "collective guilt" to Germany after WWI would end up teaching the global community hard lessons about who to blame for war crimes
July 25, 2014 -- Updated 1245 GMT (2045 HKT)
John Sutter responds to criticism of his column on the ethics of eating dog.
July 25, 2014 -- Updated 1302 GMT (2102 HKT)
Frida Ghitis says it's tempting to ignore North Korea's antics as bluster but the cruel regime is dangerous.
July 25, 2014 -- Updated 1850 GMT (0250 HKT)
To the question "Is Putin evil?" Alexander Motyl says he is evil enough for condemnation by people of good will.
July 24, 2014 -- Updated 1803 GMT (0203 HKT)
Laurie Garrett: Poor governance, ignorance, hysteria worsen the Ebola epidemic in Sierra Leone, Guinea, Liberia.
July 24, 2014 -- Updated 1349 GMT (2149 HKT)
Patrick Cronin and Kelley Sayler say the world is seeing nonstate groups such as Ukraine's rebels wielding more power to do harm than ever before
July 23, 2014 -- Updated 2205 GMT (0605 HKT)
Ukraine ambassador Olexander Motsyk places blame for the MH17 tragedy squarely at the door of Russia
July 24, 2014 -- Updated 1142 GMT (1942 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1853 GMT (0253 HKT)
Les Abend says, with rockets flying over Tel Aviv and missiles shooting down MH17 over Ukraine, a commercial pilot's pre-flight checklist just got much more complicated
July 24, 2014 -- Updated 1317 GMT (2117 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1637 GMT (0037 HKT)
Gerard Jacobs says grieving families and nations need the comfort of traditional rituals to honor the remains of loved ones, particularly in a mass disaster
July 24, 2014 -- Updated 1413 GMT (2213 HKT)
The idea is difficult to stomach, but John Sutter writes that eating dog is morally equivalent to eating pig, another intelligent animal. If Americans oppose it, they should question their own eating habits as well.
July 23, 2014 -- Updated 1630 GMT (0030 HKT)
Bill van Esveld says under the laws of war, civilians who do not join in the fight are always to be protected. An International Criminal Court could rule on whether Israeli airstrikes and Hamas rocketing are war crimes.
July 23, 2014 -- Updated 1408 GMT (2208 HKT)
Gordon Brown says the kidnapped Nigerian girls have been in captivity for 100 days, but the world has not forgotten them.
ADVERTISEMENT