Why WhatsApp Is Worth $19 Billion, and Why the Telecom Industry Should Be Afraid
The past week in tech news has been dominated by Facebook’s acquisition of WhatsApp for $19 billion ($16 billion + $3 billion retention). Many articles, comments and tweets reference the dot-com bubble and desperation, and are generally negative. But they’re dead wrong.
Messaging is an important part of how people use the Internet. It is an even more important part of how people use their phones. As telecom competition heats up while people make fewer actual phone calls, the telecom companies have attempted to claw more money from their subscribers via increased data and SMS pricing. It’s a frustrating and losing position, especially as alternatives have gained traction.
WhatsApp, like Apple’s Messages, effectively moves SMS from telecom networks to the Internet, where it is transport agnostic — it can run over 3G, 4G, LTE, Wi-Fi or anything else that can get a basic Internet connection, even a bad one. This is critical, and it is a big part of why WhatsApp is growing so fast and has such a broad international footprint.
In terms of SMS messaging, WhatsApp is already as large as half of all global texting traffic. This means that SMS, the fastest growing telecom application (as opposed to straight transport) is about to be overtaken by a third-party app. With a team of about 50 people in four years — welcome to the new world order.
Essentially, Facebook just bought the future of mobile messaging — the next-generation SMS replacement — for 10 percent of the market cap of AT&T, five percent of Verizon, half the cost of Orange, 75 percent of the price of T-Mobile. That should scare the crap out of every telecom company (or even cable, for that matter) in every part of the world. Apple and the app economy it started has now turned them all into transport networks with little or soon-to-be no actual application value.
What Facebook understands, and why the precedent-setting $19 billion figure should seem like a smart if aggressive buy, is that in five years or less, AT&T, Verizon, T-Mobile, Sprint, et al, will be relegated to networks that no one cares about, other than how fast and how reliable of an Internet connection they can deliver.
And this will also happen to the cable companies. The only thing people hate more than telecom companies is cable companies. Right now, cable companies are doing everything they can to bundle content and lock in customers — just like the telecoms. Comcast just announced plans to buy Time Warner Cable (which is just the cable service, not the media company) to grow its subscriber base and to get more “pipes.” However, Google Fiber and the telecom companies (AT&T, Verizon) will, of course, fight them.
In the short term, all of these players will look the same, even Google Fiber, with cable TV bundles that look like they currently do. However, Netflix and Amazon Prime are leading the charge with “apps” that unbundle the use of the pipes from the content. Sony and Microsoft are building business models around their consoles. And others — both startups and large companies — will continue to push down this path. The very disruption that WhatsApp brought to SMS and that threatens telecoms is also currently being forged in the cable industry.
WhatsApp shows that the power of an app and its associated infrastructure can, for a very low cost and in a relatively short period of time, completely disrupt what many believed was an unassailable piece of a powerful telecom market.
Andrew Busey has pioneered some of the industry’s most important Web technologies — including work on Mosaic, the first Web browser (now part of Microsoft Internet Explorer); creating iChat, the first Web-based chat system and one of the first instant messaging applications; and building WebCenter, the first major Web-based customer service technology (now part of Avaya). He is currently CEO and co-founder of Team Chaos, partner at Chaotic Moon, and is developing Banter, an anonymous social chat network. Reach him @andrewbusey.