Is the Facebook takeover of WhatsApp a sign of a tech bubble?
Comment of the Day

February 21 2014

Commentary by David Fuller

Is the Facebook takeover of WhatsApp a sign of a tech bubble?

Here is the opening of this topical article from The Telegraph:

Facebook's shock purchase of the smartphone messaging service WhatsApp has pushed technology deal-making to the highest levels since the dotcom bubble burst at the start of the century.

The $19bn (£11.4bn) takeover is the fourth biggest technology acquisition in history, and means that $42.4bn-worth of mergers and acquisitions have been agreed in the first month-and-a-half of 2014 – a 14-year high – according to data from Thomson Reuters.

The extravagant valuations of technology companies have seen dozens of founders turned into millionaires overnight, but have also fuelled fears that the crash of 2000 will be repeated, with WhatsApp just the latest example that the sector is overheating.

On Wednesday night, Facebook chief executive Mark Zuckerberg announced the takeover, a radical move to protect his company’s status as the world’s dominant social service.

This figure is expected to reach 1bn within a few years, making WhatsApp one of the world’s biggest companies in terms of user numbers. However, its low fees – it charges users just 99 cents a year – and a promise not to add adverts have led to questions about whether WhatsApp can ever achieve the revenues to justify its valuation.

A host of companies are looking to cash in on the growing demand for technology investments.

Twitter floated on the New York Stock Exchange in November, with the social network now valued at $30bn despite losses widening last year; King, the British games maker behind the phenomenally-successful Candy Crush Saga, has filed for a New York listing; and Snapchat, a photo-sharing app without any revenue, is believed to have rejected a $3bn bid from Facebook.

David Fuller's view

“It’s like déjà-vu all over again”, as Yogi Berra said in another context. We saw it in the late 1990s with tech.  Alan Greenspan described it as “irrational exuberance”, before he was hounded into silence. 

A good bubble is exciting.  Today, clever young techies are becoming millionaires and even billionaires.  Speculators are mostly profiting from the new and fashionable corporate flotations and takeovers.  Bubbles end badly but they usually carry on inflating for longer than most rational (non-participating) commentators expect.  I do not think this tech bubble will rival the 2000 mania because that memory is still reasonably fresh. 

Meanwhile, millions of mostly youthful people are enjoying the plunging cost of communicating with each other around the globe.  However, the conventional phone network companies are losing some revenue.  

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