By James Saft
Feb 20 So now we know: Mark Zuckerberg is a
That's true, at least if you accept his logic, which lays
great emphasis on the sheer scale of users of mobile messaging
company WhatsApp, which Facebook is buying for an
astounding $19 billion.
"WhatsApp is on a path to connect one billion people,"
Zuckerberg said in announcing the deal. "The services that reach
that milestone are all incredibly valuable."
Zuckerberg's Facebook update about the deal only mentioned
two numbers (neither of them with a dollar sign in front):
WhatsApp's current 450 million active users and the aspirational
So on the basis that this is all about scale, we find that
Facebook, the current market valuation of which works out to
about $140 per active user, is paying roughly $40 per WhatsApp
See what I mean, value. Maybe even deep value in the
somewhat askew world in which Zuckerberg operates.
Now, to be clear, I think this is a crazy valuation.
WhatsApp is said to be profitable, but its only revenue source
is a modest annual $1 subscription which only is levied after a
year of free use. Even if it gets to that billion and even if
they all pay up, that means it will take Facebook more than two
decades to earn that $19 billion back. And opportunities for
other income are limited by a (for now) vow not to sell
advertisements or user data.
But seen from Zuckerberg's point of view, the deal makes a
certain bizarro world kind of sense.
Zuckerberg has, incontrovertibly, two assets going for him:
a company and a currency. The company, Facebook, is profitable
but vulnerable. The currency, Facebook shares, is unbelievably
strong, astoundingly over-valued.
And it is not just that Facebook's franchise, which allows
it to make a slender profit, is vulnerable - to new entrants, to
teenagers who rightly want to avoid the likes of me - the
currency is a massively leveraged bet on that franchise.
The market says Facebook is worth more than $170 billion, or
about 110 times trailing earnings. Any hint, not just of
displacement by other products, but simply of less rocket-fueled
growth, and that currency is going to go down very quickly.
A MAN POSSESSED OF A VALUABLE CURRENCY...
A man possessed of a currency which is very valuable but
likely to go down quickly in the face of competition is quite
right to use that currency to buy cheaper things, especially the
competition. That's particularly true if that valuation isn't
moored to a genuinely rational view of future profitability, but
rather to the perception that Facebook has a special or unique
It is much harder, however, to view Facebook as unique if a
company like WhatsApp can come along and build another
one-billion-user operation in a few short years. Just as
19th-century investors, faced with the innovation of the
railroad, made bad decisions because they failed to see that
railroads wouldn't just change the world, they would change the
world for other railroads as well, so may we be failing to
recognize that Facebook, or WhatsApp, may look in several years
like just one of many such outfits.
Benedict Evans, of Andreeson Horowitz, a Facebook investor,
says in a blog post the correct question is not about the $19
billion sticker price but rather "is this worth 10 percent of
I think that is exactly right, but I come to a different
The deal is mostly in shares and as such we should all be
aware that this rough $40 per user (or $19 per user at one
billion) figure is purely notional. It is not simply that the
number of users may go up or down, so may the currency.
Scale that currency back enough and the deal starts to make
My larger sense is that Zuckerberg, having identified the
phenomenon that big networks command big prices, is trying to
buy up the competition. That, strangely, is an acknowledgment
that innovation is a threat and a bet against future innovation.
Both things can't be true.
Zuckerberg, trapped in a bubble not of his own making, is
executing the standard plays.