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How Facebook Got Snookered in WhatsApp Deal

How Facebook Got Snookered in WhatsApp Deal

Facebook got caught up in a typical bidding war game: A company justifies paying an incredible price because it feels there must be value there if the competition is bidding so aggressively. Once the other company in the supposed bidding war is disclosed, it typically points out that it either had not been bidding at all or stopped bidding long before the price reached nosebleed territory.

By Rob Enderle
02/24/14 5:00 AM PT

It's not often I see news that surprises me, but Facebook paying nearly US$20 billion for an instant messaging app had me scratching my head. People have been paying too much for properties for some time, but this is crazy money for a class of product that stopped being trendy nearly a decade ago.

I've come up with three reasons, none of which are mutually exclusive, as to how Facebook was tricked into massively -- boy, that word is just not adequate to describe this -- overpaying for this property. This should be a wakeup call for Yahoo, Microsoft and Aol, and it will be interesting to see how Google responds.

I'll close with my product of the week: a cool touchscreen monitor from Dell for us Windows 8 users.

Consider the Metrics

Facebook is a social network and it came to market long after instant messaging products had mostly gone the way of the dinosaur. They failed largely because their owners couldn't agree to let them communicate with each other. Imagine having email systems that only worked inside their own ecosystem -- which is kind of what we had before the Internet, with things like IBM Profs. The folks at Facebook forgot that IM was largely obsolete and measured it on engagement.

Engagement requires that people respond to each other. It's optional in a social network, but with a communications system like phone, email or IM, engagement is the whole point. Folks specifically use the system to communicate -- that is what it is for. So we don't measure it on engagement, because that would be silly -- like measuring a window on resolution because we grew up with TVs and no windows. A window would trump Ultra HD, but the measurement would be silly.

So not remembering IM -- living under the belief that engagement was incredibly important -- Facebook saw WhatsApp not as an IM platform, but as an incredibly successful social network with near unlimited value.

You know, if Facebook really wants engagement, it might want to think of buying FreedomPop. It goes far farther than WhatsApp and it could accommodate the entire Facebook mobile experience.

Freedom Phone uses VoIP cellphones and charges a fraction of what a typical cellphone carrier charges. Users could also have put WhatsApp on the phones, and Facebook probably could have bought it for closer to Instagram's price. Just saying...

The Carriers' Role

Unlike a property like Instagram or YouTube -- where the value is in the product and the service is delivered over the Internet -- WhatsApp has as a core value the ability to go around SMS. It is kind of like VoIP (like Skype) but just for messaging. It is incredibly popular in Europe because there are high charges for cross-border SMS.

It saves you money by going around the expensive carrier services built into phone plans. However, these charges are in the process of being eliminated for messages that originate and terminate in Europe, as part of a process to eliminate roaming charges in the EU.

In addition, the service likely was successful because it operated under the radar. The carriers didn't know how much money they were losing to WhatsApp and so didn't move to block it or make it more expensive to use (which is what they did with VoIP when they stopped offering unlimited data plans).

Thus the value of the offering is in the hands of carriers that either will eliminate that value through targeted action or have much of it removed by government action, at least in Europe.

Bidding Games

We've now seen inflated acquisition prices a number of times: Microsoft with Skype, and HP with Autonomy come to mind as the two largest before WhatsApp. A company is led to believe it is bidding against someone else and ends up bidding against itself. In HP's case it was Oracle, and in Microsoft's case, it was Google

A company justifies paying an incredible price because it feels there must be value there if the competition is bidding so aggressively, and it doesn't want to lose. Once the other company in the supposed bidding war is disclosed, it typically points out that it either had not been bidding at all or stopped bidding long before the price reached nosebleed territory.

This is a common game played well by those that make a living out of selling companies, because the bidding process isn't transparent and prospective buyers easily can be fooled into thinking something is happening that isn't. Based on coverage, I think Google is likely the company Facebook thought it was bidding against, but I'll bet Google exited the bidding process well below $5B because even Google isn't that crazy.

Wake-Up Call

I imagine this is a huge wake-up call for Microsoft, Aol, and Yahoo, which have large languishing IM platforms. If they were to cooperate with each other and market these offerings, they could be worth far more than they are, based on what Facebook paid for WhatsApp.

If one were to acquire the other two and position the combined customer base against the same opportunity, it likely could sell the result to Google or Microsoft for a fraction of what Facebook paid for WhatsApp -- and it actually might have something more valuable.

The older platforms play to an older demographic that isn't as flighty as the one WhatsApp targets. There is gold in this opportunity, and if it turns out that Google was massively outbid in a WhatsApp war, I expect it will attempt to correct its miss with an in-your-face acquisition that will make Zuckerberg look stupid.

In any case, I expect the drama here to continue for a bit longer.

Wrapping Up: Bringing Back Memories

Watching Facebook make this mistake reminds me of a motorcycle purchase I made over a decade ago. I ended up paying about a grand too much, because I was led to believe the bike was newer than it actually was. My wife has never let me forget that.

Facebook is my buddy this week, for as stupid as that motorcycle decision was, its near $20 billion purchase of a communications product makes my goof look practically brilliant. Thanks Facebook, for setting a new bar for foolish.

Product of the Week: Dell P2314T Touch Monitor

Product of the Week

Windows 8 is so much better with touch, but if you live much of the time on a desktop computer, touch monitors historically have been really hard to find, as well as poorly functioning and wicked expensive.

Dell sent over its P2314T monitor to use with its Android based Cloud Connect client, and I started using it with one of my Windows 8.1 machines. Getting touch back is pretty marvelous.

Dell 27 Touch Monitor P2714T
Dell 27 Touch Monitor - P2714T

The monitor has decent specs, with 1920x1080 resolution, a strong viewing angle, and high color brightness. As a touch monitor, it supports all 10 fingers, which is critical if you want to use the full set of Windows 8.1 touch features.

One of the important aspects of this monitor is a stand that can lie nearly flat so you can better work with the product collaboratively. At 17W, it doesn't pull much power, so if you are into green or just lower energy bills it helps with that.

Currently Dell is running it with a $100 discount so it is under $350 (just) -- a pretty nice value.

Windows 8 is so much better with a touch monitor -- and up till now, moving from a touch laptop to a non-touch desktop has been painful for me. Getting rid of that pain makes the Dell P2314T my product of the week. (Though if I were to buy one, I'd get the $700 Dell P2714T because it is 27-inches, not 23-inches, and size does make a difference).


Rob Enderle is a TechNewsWorld columnist and the principal analyst for the Enderle Group, a consultancy that focuses on personal technology products and trends. You can connect with him on Google+.


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