With Yahoo! Inc. (NASDAQ:YHOO) snatching up Summly for a whopping $30 million from a 17-year old Brit, and Facebook Inc (NASDAQ:FB) spending $1 billion on Instagram last spring, mobile startups are commanding significant premiums these days. So it’s no surprise that one of the world’s most popular paid apps, WhatsApp, is reportedly playing hardball with Google Inc (NASDAQ:GOOG) in acquisition talks. After negotiating for several weeks, rumor has it WhatsApp wants close to $1 billion from Google Inc (NASDAQ:GOOG).
WhatsApp is playing it smart. Mobile messaging is an area of intense interest to Google Inc Google Inc (NASDAQ:GOOG), and it should be willing to spend $1 billion on the most popular messaging app in the world.
Why Google is talking
Google Inc (NASDAQ:GOOG) definitely doesn’t need WhatsApp’s technology. In fact, Google Inc (NASDAQ:GOOG) already provides mobile apps that do everything WhatsApp does and more. Unfortunately, the company has been unable to gather the adoption rates that make these social services valuable, and it’s done a poor job of servicing those users that do try out those apps.
Those are areas in which WhatsApp excels. It’s the top paid app in 119 countries and has over 100 million downloads on Google Inc (NASDAQ:GOOG) Play. With a renewed focus in the over-the-top mobile messaging services, Google may be better served by buying out WhatsApp than trying to build up its smaller and scattered user base.
This reminds me of precisely why Facebook purchased Instagram last year. While the company certainly had the technology to build a competing service, Instagram already had a strong user base that made it valuable to Facebook.
Billion dollar babies
At the time Facebook Inc (NASDAQ:FB) announced its acquisition of Instagram, the app had about 30 million users and just released the Android version of its app. To almost any other company $1 billion may have been too high of a price, but it was well worth it for Facebook.
Instagram was doing everything Facebook wanted to be doing on mobile. Users had no problem using the app to share photos of what they’re up to and their location. Since the acquisition announcement, Instagram has grown to more than 100 million users. Through a few small tweaks, Facebook is driving more traffic to Instagram, and reducing the amount of traffic it sends to other social networks such as Twitter.
While there’s no exact numbers on how many active users are on WhatsApp, estimates put it well above 100 million and potentially in the 200 million to 300 million range. It almost certainly has more users than Instagram did at the time of its buyout. What’s more, WhatsApp generates revenue, unlike Instagram. With a $0.99 price on iOS and a $0.99 per year subscription model across other platforms, the company generated an estimated $100 million in revenue last year.
If Instagram was worth $1 billion to Facebook with a significantly smaller user base and a lack of revenue, then Google is getting a great deal if it can buy WhatsApp for a similar price.
The competition
While there are plenty of popular social messaging apps available, the biggest threat in the space is Facebook. Facebook has the resources and user base to take on these small app startups, and is one of the few publicly traded companies with a significant market share in the space.
Last week, Facebook made an advancement in its mobile presence with the release of Home. Home integrates Facebook Messenger, Facebook’s social messaging app, quite elegantly with the Android OS using what it calls “Chat Heads.” The user interface puts messaging at the forefront of the phone experience, and doesn’t require users to keep chats in a separate app.
While Facebook might have an advantage in technology, it still needs to prove it can leverage its more than 600 million active mobile users to become as successful as WhatsApp. That’s probably why the company was also in talks with WhatsApp last year. Facebook is still playing catch up despite its huge user base, but Home may help convert some of its mobile users to Messenger users too.
Yahoo! Inc. (NASDAQ:YHOO), with its new mobile focus under Marissa Mayer, is a potential threat as well. While the company hasn’t made any significant moves in the space, its subsidiary Yahoo! Japan purchased a 50% stake in WhatsApp’s Korean-based competitor KakaoTalk last October. Since the purchase, KakaoTalk surpassed 10 million downloads in Japan, and is putting increased pressure on Japanese native LINE.
While Mayer seems to be in acquisition mode, something on the scale of WhatsApp doesn’t seem to fit her MO. She’s focusing on small mobile startups (less than $100 million) whose talent and technology integrate well with Yahoo!. But with a wide ranging user base and a focus on mobile, Yahoo! should not be ignored. Additionally, with the quickly growing popularity of messaging apps, it’s not out of the question for Mayer to make an exception.
Bottom line
Google missed the boat in the mobile messaging boom between 2010 and today. If WhatsApp is willing to sell for $1 billion, it really doesn’t look like too high of a price for Google to pay in order to leapfrog the competition, particularly when compared to Facebook’s Instagram acquisition. It’s also an opportunity for the company to stay ahead of Facebook in the messaging space, and beef up its offering to Android users just as Facebook is doing the same.
With such a large stake in mobile already, Google ought to be willing to pay the premium WhatsApp is asking.
The article Google is Getting the Message originally appeared on Fool.com and is written by Adam Levy.
