Big difference: Skype had many more than the handful of employees needed to run WhatsApp. Their cost base was hundreds of millions.

WhatsApp seems to run lean and mean, and that makes a big difference in terms of keeping it profitable.

This is slightly misleading in that a business with no revenues doesn/t have that much work to do.

WhatsApp makes $1/user/year after the first year, and appears to keep users around pretty much forever because it's such a good deal.

So that's a revenue that, today, is probably a sizeable fraction of $400m/year. All that with a few dozen employees.

You guys are taking this comment to litterally.

Sales, marketing, accounting, legal, and financial controllership are going to skyrocket when this company has a revenue stream that is worth NPV=$19B.

This is a credit to the company; who like instagram was able to build much value with few FTE's. But building a company "worth money" and building a company "making money" are really different things.

This is smart from a founder's perspective, because in a sense all of those other employees would just be dilutive of attention and likely equity. But from an economic perspective, it's jumping the gun a bit to conclude what the steady state economics will be.

Assuming Google/Apple maintain respective strangleholds, continue to share the wealth, etc. The "app store" craze could fizzle out, nobody knows for sure.

WhatsApp didn't have "no revenue", they had a much simpler revenue stream.. But your point stands. No doubt a lot of Skype's operation costs were the business and marketing side of things.

It seems these types of transactions have nothing to do with potentials profits, but with power over users, or "lying on a bed of weeds and ripping them out before they strangle you".

And with not paying tax - Microsoft has all this money sitting in Europe that it has to pay tax on if it returns to shareholders, or it can waste it on buying companies instead.

Speculation - pure and simple. its an easy sell at the moment to executives and financial types who don't understand how computers work. The reality is that all these services (just like icq) are simple to replace and will only become moreso. if you try to make more than a trickle of income users will turn away. it won't pan out long term for many of these big purchases.

I wonder if IAP could work for social... "You used all your daily premium smileys. Click here to buy more!"

Check out the business model of Line, the WhatsApp competitor dominant in Japan. It's almost exactly what you said. http://www.oneskyapp.com/blog/secret-monetizing-messaging-ap...

Skype has 663 million "accounts", very few of these were active.

According to http://www.statisticbrain.com/skype-statistics/, only 31 million Skype users are active as of 2012.

The statistics sounds BS (as a lot of them are).

FWIW, I don't know anyone (across 5 countries of friends and business partners) who doesn't use Skype.

Skype's use prevails mostly around international calling, video conferencing and professional chats. It isn't really an everyday use thing like WhatsApp which, where dominating, is an entire replacement of SMS. My Skype account gets sparingly used for anything else than talking to a client.

That could make sense, because that's what I've seen it used for: international calling, video conferencing and professional chats.

Still, wouldn't that amount to more than 30M users?

Only?

Even if user numbers were comparable, the number of users for WhatsApp is still curving upwards:

http://cdn-static.zdnet.com/i/r/story/70/00/026526/screen-sh...

I would also argue that being installed and used on mobile devices is more valuable than being installed on a desktop is.

They already have 400 million users, and their growth might continue. But there are only 7 billion people on earth, they are running out of room to prove that valuation. Even if they literally sign up every single person on earth, that's still more than a few dollars per person in revenue required to make the $20 billion valuation worthwhile.

Google earned about $12B on revenue of ~$60B in the 2013 financial year, and trades at $404B.

That's 33 times earnings, and Google isn't growing at 70% a year.

400 million users * $1/year = $400m/year, but WhatsApp's expenses look pretty low. Say earnings of 200m/year

$200m * 33 = ~$6B.

That 70% growth rate makes all the difference.

On the other hand, Google is investing massively in "next big thing" r&d, and even if all its efforts to create new markets fail, it's likely to still be a major player in adtech in 33 years time.

WhatsApp has staggering growth on the basis you don't have to pay for it and its founders are hostile towards advertising, neither of which lend you towards thinking it'll ever reach the 33x P/E ratio (actual P/E ratio >800) still less be significant in 33 years time.

Err..

Not sure where to start. What you say isn't even wrong, exactly.

1) You seem to think that the price/earnings ratio has something to do with how the company will do in (P/E) years. It doesn't. As a specific example, companies that are takeover targets have higher PE ratios than they would otherwise, even though they probably won't exist soon.

2) Generally companies with high growth trade at high PE ratios. That's why Google has such a high ratio (it's unclear if you understand this). WhatsApp has even higher growth. AFAIK WhatsApp's revenue is not publicly known, and I'm estimating it at $200m for next year[1].

3) Where are you getting "actual P/E ratio >800"? You know WhatsApp's revenue?

Edit: I see WhatsApp revenue was $20M last year[2]. With growth rates like they are seeing I don't think this says much other than that the revenue model works.

[1] Forbes estimates it at $400M, so I'm being conservative: http://www.forbes.com/sites/hollymagister/2014/02/21/whatsap...

[2] http://www.forbes.com/sites/parmyolson/2014/02/19/exclusive-...

WhatsApp is much better than Skype as an acquisition.

1. It's a single-purpose, specialised application which makes it hard to compete against. Once you can't subtract anymore from a software you are left with the essence of it. If you build that rock-solid you can eliminate any competitive threat on the product front. Kind of like unix utilities.

2. On the network front they played smartly by going after your phone book which makes them network agnostic (Skype, FB, Google, iMessage, BBM are all stuck within their own walls). At this point WhatsApp can just sit back and let network-effects do the work (they have spent 0 on marketing to date).

Between 1 & 2, competing with WhatsApp is hard and they are resilient to disruption. That's a great relief for any tech acquisition.

Another thing I like about WhatsApp is that they didn't do a whole lot other than fixing SMS. They did this by adding group messaging and reducing costs. And for now at least, I don't get any marketing spam on WhatsApp like I do over SMS.

Skype's shelf life was always questionable to me. It was and will remain relatively easier to disrupt.

Fixing SMS is the interesting thing. GroupMe was bought by Skype for many millions, and the key thing about GroupMe was supposedly fixing SMS. But I have no idea what happened to GroupMe after that acquisition. Like many startups, perhaps acquisition was death for them, although it seemed to me that would make little sense for Skype's motivations. I don't think they would have been simply looking for talent the way acquihires usually do.

I still use GroupMe every day to group chat with family and friend groups

One thing many people failed to take into account in the skype deal was that was cash sitting in overseas accounts and had microsoft repatriated those funds they would have been hit with a 30% tax or something on them. By buying an overseas asset they effectively got a huge discount on their money.

It was 30% off, I saved a fortune!

Is it insane to speculate that pressure is coming from government agencies? In a talk at Fosdem Poul-Henning Kamp talks about the pretty insane timeline with skype and how much it potentially benefited the NSA.

http://youtu.be/fwcl17Q0bpk?t=9m45s