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Why Whatsapp is worth $19 billion

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The rivalries among the tech industry’s giants have often resembled a Game of Thrones in which companies such as Amazon, Apple, Facebook and Google constantly try to invade one another’s online kingdoms. On Feb. 19 Facebook took a dramatic step to defend its turf, saying that it would pay $19 billion for Whatsapp, a messaging service that also had attracted the attention of Google and almost certainly other suitors.

Even veterans of Silicon Valley goggled at the staggering sum of money changing hands, which comprises a mixture of cash and shares in Facebook. Whatsapp’s price tag is the most ever paid for a venture-capital-backed company, and gives a start-up founded in 2009 a valuation that is greater than that of household names such as Southwest Airlines and Sony.

The deal marks the coming-of-age of messaging apps, which let people send text messages and share photos and other stuff without incurring charges from telecommunications firms. Whatsapp is free to use for 12 months and then costs a mere 99 cents a year. Plenty of other such apps have sprung up, including Viber, which Rakuten, a Japanese Internet giant, recently bought for $900 million, and the immensely popular Wechat, which belongs to Tencent, an innovative Chinese company.

All of them have benefited from two profound trends that are transforming the technology landscape. The first of these is the rapid growth of Web-connected smartphones, which has allowed Whatsapp and its rivals to spread like wildfire. Announcing the deal, Facebook boss Mark Zuckerberg said that Whatsapp had reached 450 million users much faster than any other Web service. It also has made itself addictive: 72 per cent of its users are active on it every day. The viral nature of its appeal means that it has achieved all this without spending a penny on marketing.

Casual-gaming apps also are spreading rapidly on mobile devices. King.com, which filed for an I.P.O. in New York on Feb. 18, is a case in point. The company, which makes the hit game Candy Crush Saga, saw its monthly active users soar from 67 million in the fourth quarter of 2012 to 408 million in the same period last year. Its revenues soared too, hitting $1.9 billion last year compared with $164 million in 2012.

The second trend behind Whatsapp’s success is the dramatic decline in the cost of building start-ups. Thanks to things such as cloud computing, which lets young firms buy vast amounts of cheap computing capacity, entrepreneurs can create globe-spanning businesses on shoestring budgets. Whatsapp has only 32 software engineers, which means that each one supports some 14 million users. Nonetheless, the volume of messages it is handling is said to be the equivalent of all the S.M.S. messages transmitted by the world’s telecommunications companies.

Indeed, Whatsapp’s success in many ways mirrors that of Facebook itself, which came from nowhere to dominate social networking. Recently, however, Facebook has been losing some of its coolness, especially among younger users. That may explain why the famously paranoid Zuckerberg is willing to pay a king’s ransom for a company that might ultimately eclipse his own creation. He has spent lavishly before, paying around $1 billion for Instagram in 2012.

Does the whopping price tag for Whatsapp make sense, though? Assuming that it keeps adding users at its current rate of one million a day, and that they end up paying for its service, it could generate hundreds of millions of dollars of revenue. Twitter, which reported $665 million of revenue last year, has a market capitalization of $30 billion.

Much will depend on how well Zuckerberg gets on with Jan Koum, the boss of Whatsapp, who is joining Facebook’s board and will run the app as an independent business. Koum, who has a well-known aversion to collecting people’s data and plastering advertising over his app, seems an odd bedfellow for Facebook. Clearly, though, the deal was one that he couldn’t refuse.

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