What if they're worried about an independent Whatsapp being a threat to FB's business model? As in, maybe Whatsapp isn't "worth" $19B (whatever that means) but it's a threat to destroy $50B of Facebook shareholder value? In that case it would be rational to buy them out to ensure that doesn't happen.

Which is probably why Buffet doesn't invest in fads and social media: http://www.fool.com/investing/general/2014/01/27/why-warren-...

I think the only option they really have is to spin off new social networks to cater to new generations and become just a holdings company for them. Sort of a YC of social networking. Their main advantage would be the ready source of funding vs a random college student thinking up the next Whatsapp or Instagram.

The numbers needed to match Facebook are big. The fact that Whatsapp, Viber, Line, etc are even able to approach those numbers speaks volumes: they have succeeded in executing on their businesses, and there is demand in the market for solid messaging products that evidently the incumbents have not been able to fill. Buying out a (exceptionally successful) startup before it becomes a potential competitor makes total sense.

Have you tried? It is hard, especially in a saturated market with plenty of choices. For mass media (TV, news, social), the scarcity relationship is reversed: you're effectively competing for the user's time and attention. Almost zero-sum, especially when considering the allocation of advertising dollars.

Additionally, the barrier of entry is low, since anyone can make a Twitter clone in 20 lines of Ruby on Rails. So you'd be trying to carve out a niche in social, fighting against network effects and the dozen other college dropouts working on the same idea, while hoping Facebook won't decide to implement your differentiating feature. That's not easy.

> Attracting and retaining users that will pay you is hard.

For purely discretionary purchases, yes. This is what makes the success of eg, Viber all the more remarkable. They made a $900 million business by selling electronic stickers. Anyone can sell stupid stickers, but it takes sheer execution to get $900 million for it. Not easy at all.

Since it's so difficult to get paying users in social, you can hedge by relying on a (slightly) less elastic source of revenue: selling those eyeballs and clicks to advertisers. But the traffic needs to be high and consistent for a scalable operation. And again, you're back to square one. Not so easy.

I know of multiple ways of trying to estimate the magnitude of network effects. All come up with social networks creating O(n log(n)) value for users. If true, that result demonstrates that network effects are significant, but a better competitor does not have to have nearly the scale you'd think to be able to compete head on against the big giants.

That said, I wouldn't recommend going head to head versus FB for your next startup. But there will be no shortage of future companies posing a threat to FB like the one that FB posed to MySpace before it. And like MySpace posed to Friendster earlier on.

Let's be honest. FB has a lot of advantages here. They are the first mover, they have a ton of resources, and they have appropriate levels of paranoia about this issue. But still I'd give them substantially less than even odds of being the social king when, say, 2030 rolls around.

Yep. The threat to FB or any similarly dominant company isn't head-on, but rather sideways, where peripheral businesses could eat into their core. So far, Facebook is doing a pretty good job of recognizing those risks.

An interesting exercise is to think of how companies have handled those risks and the effects of that. Eg, IBM's stance on software as they gave Microsoft exclusive licensing rights, only to backtrack with OS/2 and giving up. Microsoft dismissing the Internet, then playing "me-too" ever since with Bing, Windows Phone, Azure, etc etc. Google's social networking efforts with Orkut, Buzz and Plus.

> less than even odds of being the social king when, say, 2030 rolls around.

Agreed, when you're dominating a competitive industry, it's pretty hard to stay on top indefinitely. Nowhere to go but down.

That's incredibly difficult to do.

It means it'll give an appropriate ROI for 19B

> but it's a threat to destroy $50B of Facebook shareholder value

If you think the destroyed 50B is greater than the expected value of the next best option for those 19B, then I suppose it's justified.

But then again, that does mean that it's relatively easy to poke at Facebook's empire. I think it implies there's not a very efficient market. It means these things can keep happening over and over, draining Facebook's bank account, until it's no longer worth it for them to keep buying. (This may be what the other poster was alluding to by saying that the 50B isn't actually worth much.)

I think it is a very positive thing for the current ecosystem that there are many mobile apps with which we can communicate and share content. Contrast this with Google's dominance of search for the past decade.

The bigger question to me isn't if Facebook wins or loses but what control Google and Apple are able to exert on communications platforms in the future. (Possibly none)

I hate to pick on you, but anyone who says WhatsApp is not worth $19 bil has not seen the Chinese version of WhatsApp, WeChat. WeChat is a combination of WhatsApp and Facebook. Everyone in China uses WeChat as messenger and as a pseudo-Facebook. The risk of WhatsApp becoming the WeChat for the rest of the world was a HUGE risk for Facebook. It has a very strong hold in the middle east and was gaining a ton of traction every where else. WeChat is a less-invasive version of Facebook that many people would gladly flock to.

I believe it is well know that economic condition have been very unique last few years in that there is lot of investor money in market trying to find its home. Even if returns on VC is subpar many investors wants to give it a try because returns elsewhere sucked anyway and also there is a chance of winning the lottery. As the stock market and real estate continues to gain momentum and confidence, money would start start migrating back.

My prediction is that in next 5 years, investors are going to realize that it was a good try, VC returns sucks compared to S&P/real estate and they start pulling out. This will first cause shutdown of recently mushroomed accelerators/startup schools. That would then further spook VCs causing chain reaction eventually leading to meltdown. I think more prudent VCs such as Y and Sequoia would continue as usual but many other will simply shutdown because of lack of funds. This is not to contradict Sam's predictions. Lot of the companies in his list can go big and easily double the value but in 5 years that would have much less effect on how much investment money VCs aquire.

Uber has customers, real revenue (in the billions). So does AirBnb. So does SpaceX. So does Palantir.

Just name dropping WhatsApp is pretty low brow. There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.

The 2000 tech bubble also came and went without every single company going bankrupt. So the fact that some companies are doing great things means squat when it comes determining whether there is a bubble or not.

I can see an argument where the worlds most used mobile messaging app is worth at least 8% as much as the world's most used social network.

During the '00 bubble people said Yahoo's valuation was inflated because all the bubble companies spent their money on Yahoo ads. But for my money Yahoo has turned out to be worth its bubble valuation. Even if most of its value has come from a few clever investments, well, sounds like Facebook's doing the same thing.

So a PE of 60 means the market is expecting very approximately 60% year on year growth.

More "did" than can. Something is worth what someone will pay. Why was FB willing to pay $19B? The answer is somewhere between what those users are worth to FB and the threat to FB's (very real) business that WhatsApp represented. This doesn't seem bubblish to me.

My understanding is that social networks are a generational thing. Even if FB was perfect in every way, no market maven teenager (for social networks the market mavens are teenagers) wants to hang out with their aunt. The next generation will stop watching Yo Gabba Gabba, grab their iPhone 9's and want to get on a social network that's separate from their parents. Because of this, I don't see a general purpose social network surviving for longer than 10-12 years and maintaining market dominance.

FB won't be the powerhouse that it is today, but it's deeply entrenched in our internet that there is value in the social data, not the "blue room" product they offer for free now. (I hate FB, but I get it.)

Mind you, it seems like a really low quality user for FB and not something I would want to hang a bubbilicious valuation on for them -- unless FB's able to track her activity off FB as well. And I think this is the case.

I wonder if this is part of the reasoning for their increasing centralization by offering a browser and supposedly actually hosting highly shared content.

I've never been to keen on that statement. It approximates something about fairness. It's expresses something about subjective worth. But, we're talking about something with a fairly objective, if ambiguous value.

The price of something may be what someone will pay. For the value of something... I don't think this holds true. The value of a stock is objective, it's the future incomes discounted or somesuch. If you pay more than that you over payed.

My go to example for this is Facebook's IPO. Their valuation was at the time at $50/user. Can they extract that much lifetime value out of every user they have? It seems rather high to me.

I don't believe there is an industry-wide bubble going on. But it seems to me that if you hit the right keywords (social, sharing, advertising), you will be valued at the top of the range, not the bottom. Moreover, I believe these particular valuations will get market corrected sooner or later.

But FB has real profits, so you may not wanna bet too much against them. They're also locking up users' Internet access in many markets, making it literally impossible to run a competitor (without negotiating the same ISP access).

Perhaps look at Splunk, which does great not only in losing money, but accelerating those losses. (Er, I mean, they "focus on top-line growth".) But hey, maybe they can cut their costs by over 2 (eliminating all R&D wouldn't be enough) but keep the revenue coming in. Then they could be profitable before other systems and hardware catch up. They're only 12 years old, so it's still very early in their long-term story.

There is no premium if you buy and hold, in fact that's the baseline situation from which the premium is calculated. And buy-and-hold works for arbitrary timescales, while even long term puts come only in certain flavors.

That starts to seem a lot like structurally built-in upward pressure on prices.

So, one reading of the tea leaves is that something like 100B (of non-existent money) is locked up out of the hands of the people who could benefit from trading it. This, at a time when wealth disparity is not far from the Gilded Age.

There's a bubble, all right--just probably not the one the author is thinking of.

Secret raised $35m, including $6m of founder cashouts (one bought a ferrari.)

Is this a bubble? Dunno, but that's pretty frothy.

But isn't that the most important metric? I would argue there is also no metric by which a Coach purse is worth thousands of dollars but people seem to keep buying them.

I think it is just too easy to say things like this. Number one, how can anyone know this?

Number two, if not 19B then what? 18B? 5B? 500M? What? Was it overvalued by 2x or, like, 10x? If it was too much, then how much too much?

Except he's the person dictating the flow of money. It's more like a housing buyer saying there's good investments despite signs of a bubble.

The only good metric to determine how much something is worth is how much someone is ready to pay for it.

with 700m active users, they potentially could be generating ~ 3.6% of their sale price in annual revenue.

They will not charge you if, for example, you're someone living in the USA. There is far too much free competition.

For their non smartphone market (don't have numbers but its large), there is very little if any at all competition, and people in places like india gladly pay the $1 fee for a years access on their dumbphone.

I am in India and I have never been charged for Whatsapp. Every year, whatsapp decides to add more free months.

Also, there is significant competition in the messaging space in India, and Indians are not comfortable paying for anything other than their phones.

Part of that may be due to the fact that WhatsApp grows so fast that most users haven't been around for a year, but I'm under the impression that after a year, if you don't pay, the app continues to work and you never lose access.

On what planet can the act of becoming profitable be considered a "backfire"?

Revenues don't mean a thing.