GlobalGyan Blog

It's one of the biggest technology deals of recent times and there's some worry if we are seeing a repeat of the late 90s dot-com bust. (Remember, many of the 20-something old entrepreneurs were at school then and probably don't have any recollections of that euphoria and bust.)

First, about the valuation. We all know there's really no foolproof, scientific method to value many businesses, particularly in the hi-tech / nextgen space. Like art, it is often in the eye of the beholder. The best way to evaluate a valuation is to to see the most critical assumptions that one has to believe in. Let us peel it down...

Facebook has a Enterprise Value to Revenue ratio of nearly 20. In case of Google, which is obviously more mature than FB, the ratio is about 6. So, to justify the Whatsapp (WA) valuation, first of all we would need to believe that it could generate revenues of $1 - 3 Billion. Is that possible?

WA has 450mn active users and is likely to add a few hundred million new users annually. Is it reasonable to believe that it could touch 1bn users in a couple of years? Smartphone numbers are estimated to be 1.75Bn in 2014, perhaps 3bn by 2017. Can WA achieve 30% penetration? Likely. Remember, already Facebook has nearly a billion mobile users.

So, with a billion user base, WA would have to generate $1-3 per user per annum. Is that inconceivable? No, that's just about Rs 10 per month: all those forwarded jokes are worth that much, right?

Strategically, buying WA makes a lot of sense for FB. As Rene Ritchie points out, Facebook's primary business is to catch our attention (and subsequently monetize it). It was clear that people were spending a lot of time on Whatsapp; most private and small group conversations had moved there and probably FB Messenger was not having the desired impact. WA was multi-platform and easy to use (no login; no "adding"). FB cannot let people's attention wander away from any of its products; so it bought out a competitor.

Then what could go wrong?

For starters, the valuation multiples we started with could be too optimistic. Compared to other, "traditional" technology companies (Apple, IBM, Microsoft, AT&T -- their EV to Revenue ratio is 2 to 3 times), FB appears overvalued, probably Google too. So, if you took a 2X multiple, WA would have to generate $9 per user per annum, which is obviously tougher than $1-3.

The bigger issue is about the monetization strategy. Will a billion people pay a buck every year to keep Whatsapp or will they move to the next free messaging app? What caused it grow exponentially (no login, no "adding") could also be its weakness - mobile number based connections can be replicated on any other app almost as easily. Whatsapp groups will need to be recreated by the admins and profiles will need to be updated but don't underestimate the effort people are willing to put in to save a buck! As several hundred millions come up for their first payment shortly, WA will need to justify why it is better than many other multi-platform, free messaging apps (including BBM which still has many dedicated fans). And of course, the fear of advertising always lurks around the corner.

Overall, I believe it is a good, strategic move by Facebook. By paying only $4Bn (20%) in cash, and the rest through stock, FB has used its highly valued stock to make this risky move. Not only have they purchased a potential billion-dollar revenue product, they have also gained control over a major competitor that somebody else could have acquired. 

"You cannot satisfy every customer" the marketing manager said.

In a spirited discussion about the role of Web 2.0 in marketing, the conversation turned towards the large number of negative comments posted on websites and Twitter and such like. How do we know they are even for real? There are so many people out there saying what they want about our brand; we can't take everyone seriously. It could be competitors trying to malign us. Why couldn't the customer provide his mobile number in the complaint? Valid questions.

But are we trying to use these as excuses to delude ourselves that our customers are all happy and have no reason to vent their anger online? Are we using the (relatively) low penetration of the Internet (now) to treat it as a trivial medium? Most customers, when they have a problem, approach the traditional customer service channels. And most of them are willing to accept that a product or service could have a deficiency - nobody's perfect. What they do want are clear responses about what we propose to do about the situation and action to back that promise. It's only when they get automated responses ("thank you; noted; will get back; do not reply to this mail") or a stalling customer service agent ("our servers are slow/down; here's a trouble ticket #; pray") that some customers pour their sorrows in mails to the President of India or messages at mouthshut.com and Twitter.

In some cases, messages on Twitter / FB could cover issues / concerns that traditional customer service channels do not typically address ("xyz airline was late again #fail").

Marketers would do well to heed both types of messages. The first reflect angst or frustration that could lead to the customer not just complaning her case but becoming a brand un-ambassador (e.g. United Breaks Guitars!). The latter type are still not angry but gradually getting there. Registering the feedback and even involving the customer in designing a solution should be the proactive approach to managing the situation.

Every dissatisfied customer we leave out there is potentially raising an army of other similar people and can cause irrepable harm to our business. The Web provides them the platforms. Do we want to provide them a reason?