PhillyDeals: Facebook buying app as a hedge for the future

Posted: February 25, 2014

A week after Comcast Corp. agreed to pay $45.2 billion for Time Warner Cable Co. and its 11 million paying customers, 50,000 workers, $22 billion in yearly sales and high profits, Facebook pledged Thursday to spend almost half as much for WhatsApp, a tiny Silicon Valley firm that's giving away free smartphone-messaging apps.

"It's easy to say that Facebook severely overpaid," but that's the kind of gamble Internet giants make to try and stay on top, writes James M. Meyer, boss at $1 billion asset Tower Bridge Advisors of Conshohocken, in a report to clients of brokerage Boenning & Scattergood.

Popular smartphone apps, like cable TV boxes, help consumers find - and advertisers fund - the tech and video flooding the world. Facebook hopes WhatsApp will dominate messaging, like Facebook's Instagram with online photos, and Google's YouTube videos, Meyer added.

When you're as big as Google or Comcast, size is a protection against competition. When your stock is as far ahead of profits as Facebook, you have to keep betting big, or your share price crashes. The risk is you buy the wrong stuff and end up like Yahoo or AOL.

Even if Facebook manages to charge WhatsApp customers $1 a year for the service, as planned, the deal price doesn't nearly justify itself. The real attraction is WhatsApp's list of verified smartphone accounts - "a vast database of consumers' mobile phone numbers," argues Eleni Marouli, London analyst for IHS, a research firm with offices in Philadelphia.

Facebook is paying $36 per WhatsApp user. That sounds like a lot for a free or low-cost app, but it is actually "remarkably similar to the $33 per user they paid for Instagram," notes Jordan E. Rohan, New York telecom analyst at Stifel & Co. Call it protection money: If Google had bought WhatsApp instead, Facebook shares would have fallen more than 10 percent, Rohan estimates.

Where does this leave Google? In a position to buy Verizon - a deal worth $136 billion at Friday's prices (more with a sale premium) that was first rumored to be in the works five years ago, Steve Donohue, editor of the FierceCable newsletter, told readers in a note last week.

Check the map of where Google has been built and its plans to add high-speed, fiber-based Internet service. It's all in Southern and Western cities, where Verizon's FiOS fiber service has no competing presence.

Could a Google-Verizon network compete on service and price vs. Comcast-Time Warner? The prospect could comfort Washington regulators, nervous about data like last week's Akamai Technologies's State of the Internet Report, which shows U.S. Internet speeds are typically behind those in more advanced countries, like Japan and the Netherlands, even with the higher prices Americans typically pay.



comments powered by Disqus