What If WhatsApp Had Stayed Independent?

The story is out. The $10bn offer from Google, spurned. The $19bn offer from Facebook accepted. Two quirky, brilliant founders (check out their LinkedIn profiles: Jan & Brian), and a highly functional app that delighted 450m people around the world.

To people outside the tech industry, and to many inside it, understanding the value of WhatsApp and pricing it as $19bn can seem preposterous. Even in the face of Sequoia Capital's pretty clear exposition about how remarkable a company this is. In a nutshell:

• 450m active users, 70% active daily
• 32 engineers
• $1 a year price point, no ads
• Nothing spent on marketing

The deal is done. It won't be undone. In the words of Andreesen Horowitz analyst, Benedict Evans, "Facebook is being pretty aggressive in making sure it's the next Facebook." (Read Mr Evans on WhatsApp, it's deeply thoughtful.)

But what if WhatsApp had stayed independent?

It's a big ask. This is the largest acquisition of a venture-backed company ever. This is multi-generational wealth for the founders. This is an incredibly thrilling and lofty achievement.

But what if WhatsApp had stayed independent?

• WhatsApp would continue to grow: It was rumoured to be growing at 1m downloads per day, so on an annualised basis close to doubling its user base over the next 12 months, and showing few signs of slowing down.
• It would (and will) race past Facebook: WhatsApp has already grown faster than Facebook to date. The proposition is terrifically clear and simple. It's like SMS messaging but faster, easier, "free'r" and more fun. Fun Facebook and Twitter may be, there is a platonic simplicity about WhatsApp. There is very little new stuff to learn about its interaction paradigms. No question about what is public or private. Just get up and go. And WhatsApp had been able to stretch us into photo messaging.
• The network effects would take hold: If all (or most) of your friends are on WhatsApp, Viber or Kik or BBM are going to be very lonely places to be. The network effects would take deep root and except in markets where there is limited crossover of users (thing China), WhatsApp will dominate, the way eBay dominated auctions. The best network for a user is the one your friends are on.

A billion isn't cool, you know what's cool?

More billions.

By 2017, WhatsApp could conceivably be on every device outside of China. In fact, it could be as prevalent as SMS, only cheaper, faster and more fun. If its current growth rate of close to 100 percent continued, it would get to 800m by end of 2014, 1.5bn by end of 2015 and beyond.

If WhatsApp is in an exponential growth phase and it appears to be. And if the market doesn't have any natural saturation point, there is a scenario where there growth slows because they just run out of humans who have devices to put the app on.

The two contenders would be Line with its Japan/Taiwan strengths; and WeChat with its China strengths. But that's a (big) minority of the world.

A few users would grumble about user-centric, privacy-oriented WhatsApp being part of Facebook's empire. But their disgruntlement would falter in the face of not being able to easily message their friends.

There could, of course, be a new entrant. But right now it's hard to see how you defeat the network effects of WhatsApp. A new entrant launching in, say, 6 months would face an installed and active user base of perhaps 600m WhatsApp users. And that new entrant would need to find someway to persuade not just you but loads of your friends to move to the new platform.

The telcos would have been pretty solidly irritated. WhatsApp would have killed their high margin SMS business. And one might imagine some half-hearted attempts to block WhatsApp at the network level. (Which WhatsApp would have dealt with either from consumer pressure, throwing the telcos some mediocre carrier charge, or simply routing around the blockage).

If Jan and Brian stick to their plan, this business would bring them $1 per user per annum, or a cool $3-5bn a year. At $1 a year after the first year, WhatsApp represents great value for its end-users, even in emerging markets. (Compared to SMS.)

So next year, WhatsApp could reasonably expect to make around $400m (that is about $1 for every user they have today, assuming a high conversion rate). And the year after double that and so on.

If WhatsApp maintain their current engineer leverage, the company would be spitting gobs of cash out every year. Even with 500 engineers and other overhead costs, WhatsApp could generate billions a year in pure profit within 3-4 years.

Yes — assuming no more product innovation and their simple charging model — WhatsApp could have been generating $1bn+ or more free cash every year by as soon as 2016. Brian and Jan would be very rich.

Beyond their wildest dreams... but weirdly not beyond their actual reality.

Zuck has the last laugh

But when you run those numbers, it still becomes hard to compete with Facebook's offer.

Even if WhatsApp magicked its way to three billion users this year, and persuaded us all to pay a $1 a year from next year, the net present value of those future cash flows struggles to get to the $19bn offer by Mark Zuckerberg. And that is assuming a benign 'discount rate' (that is discounting the value of money today, versus the promise of risky money in the future).

In other words, even though WhatsApp was going to shuck out tons of cash for years to come, Zuck's offer was worth more.

Could they have stayed independent and stayed successful? Absolutely.

Was it the right decision to join Facebook? Almost certainly.

Worthy congratulations to them.

Do you use WhatsApp?

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Further reading

• Nice summary of key metrics of WhatsApp

Photo: Shutterstock