Understanding WhatsApp's $16 billion price tag

Thursday, 20 Feb 2014 | 1:32 PM ET
The mobile-messaging application WhatsApp and the Facebook app are displayed along with other apps on an Apple iPhone.
Brent Lewin | Bloomberg | Getty Images
The mobile-messaging application WhatsApp and the Facebook app are displayed along with other apps on an Apple iPhone.

The $16 billion Facebook is paying for WhatsApp may sound absurdly high, but the deal—and the price tag—can be explained as a key way for the social network to expand its global, mobile reach. It's WhatsApp's scale that CEO Mark Zuckerberg is focused on – he predicts it'll hit 1 billion users in just a few years—and he says it'll be key to his vision for "connecting the world"

(Read more: Is Facebook's acquisition of WhatsApp a desperate move?)

With WhatsApp, Facebook will become the biggest mobile messaging company in the world—it handles nearly as many text messages as the Telecom industry's entire $100 Billion text messaging business. WhatsApp is quickly expected to surpass the telcos texting volume. And as CFO David Ebersman pointed out on a conference call yesterday, "That's a $100 Billion business for carriers in terms of direct messaging fees. So this is a really valuable service that people are willing to pay for."

Evaluating Facebook's staggering deal
Dennis Berman, Wall Street Journal business editor & columnist, and BuzzFeed president & COO Jon Steinberg, analyze the math behind Facebook's purchase of WhatsApp.

And unlike many other high-priced acquisitions—like Instagram, which wasn't making a dime when Facebook bought it—WhatsApp already has a business model and is generating revenue. It's free for the first year, then charges 99 cents annually. There's no word on how many users pay. But Zuckerberg predicts WhatsApp could draw as many as 3 billion people a day, and says he's confident people will be willing to pay for the service.

WhatsApps value for Facebook isn't just its scale—it currently has 450 million monthly active users—but the fact that their engagement is usually high—70 percent use the service every single day. And its growth rate is breaking records: it doubled its user base in the past year and is adding a million new users every day.

(Read more: Facebook+WhatsApp, a bold move in mobile war: Pro)

Zuckerberg said "services in the world that have 1 billion people using them are all incredible valuable, and from that perspective, we just think that the growth rate that they have today and the monetization model that's early but promising, and in place… We see a pretty clear trajectory ahead."

So how does WhatsApps valuation compare? WhatsApp has nearly twice Twitter's monthly active users, and about THREE times its daily active users; Facebook is paying just about half of Twitter's market cap. And while Facebook is paying 16 times what it paid to buy Instagram, WhatsApp has 15 times Instagram's users at the time Facebook bought it. And unlike Instagram, which is slowly and tenuously rolling out a business model, WhatsApp has already proven how it can make money.

—By CNBC's Julia Boorstin. Follow her on Twitter @JBoorstin.

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  • Matt Hunter is the senior technology editor at CNBC.com.

  • Cadie Thompson is a tech reporter for the Enterprise Team for CNBC.com.

  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.

  • Jon Fortt is an on-air editor. He covers the companies, start-ups, and trends that are driving innovation in the industry.

  • Lipton is CNBC's technology correspondent, working from CNBC's Silicon Valley bureau.

  • Mark is CNBC's Silicon Valley/San Francisco Bureau Chief covering technology and digital media.