Why Is an App Worth as Much as a Small Oil Field?


Since Facebook’s acquisition of WhatsApp, commentators have debated whether the app was worth it or not. What if I suggested that the best place to look for answers could be the shale oil fields of North Dakota?

While on the surface, the dirty business of fossil fuels is nothing like Silicon Valley, many in the oil business have moved beyond the standard net present value (NPV) model for assessing the merit of investments. If you’re evaluating the rights to new shale oil reserves in a place like North Dakota, today you’d rely instead on a different economic model: option value.

I have to credit Rodrigo Canales of Yale for turning me on to the theory of option value, which looks at investments not based on revenue versus cost, but on how they increase the options available to an organization. Because this framework places a premium on investments that increase a firm’s options at the expense of their competitors’, it’s particularly suited to highly volatile industries.

So yes, Facebook has paid a lot for WhatsApp and its nearly half a billion users. But Facebook has also bought itself time to figure out how to extract value from that audience. And Google, widely rumored to be the other bidder, has lost those options and will have to settle for smaller reserves instead, perhaps acquiring one of the less-dominant players.

You can think about WhatsApp’s user base as a reserve, similar to the oil in a shale field: we know it’s there, but it is not yet clear how much value Facebook can recover. In both cases, technology increases the efficiency with which they can extract value out of this “deposit” should increase over time. In the oil business, this might mean something like fracking. In the tech business, the equivalent is mobile and increasingly contextual advertising, the primary source of value for titans like Google and Facebook. And, I would argue, it is also user experience – the ability to bring as much value to the surface of the product as possible. Whoever figures this out quickly has an opportunity to race quickly ahead in the mobile boom.

Consider the rapid progress Facebook has made on mobile, not only domestically, but in emerging markets. I just returned from a two-week visit to South and East Africa, where just a few years ago the business community was wondering whether Facebook would ever “get” mobile. And yet now, according to a number of experts I spoke with, FacebookZero represents more than 30% of the data traffic on many networks in the region. With the acquisition of WhatsApp, they are positioned to be the dominate player for years to come – giving them unheard-of leverage with the mobile operators who are the primary gateway to internet access for billions of people coming online for the first time. Talk about options!

I know that comparing social media to the oil industry is not going to make me any friends. And there would seem to be some critical differences, as there is a limited amount of fossil fuel in the ground, while new social networks and messaging services seem to be cropping up endlessly. But attention is quickly emerging as a scarce resource and Whatsapp seems to occupy a very strategic position in the communications landscape. Proximity is everything in both industries.

If you are willing to entertain this metaphor for a moment, it allows you to survey the online landscape with new eyes. Video, photo-sharing, gaming, internet radio and messaging represent massive reserves of attention. In most cases it seems that only a handful of platforms emerge with the ability to tap these reserves, largely based on the quality of their user experience.

And rarely do these platforms emerge organically from within a Google or Facebook these days.

So, to preserve their option value, the big players must invest before the valuations for Instagram or Youtube have stabilized. They are betting on the future value, not just of these platforms, but of the additional options that they will create for their organizations. We have seen this play out successfully with Youtube, whose value to Google extends beyond the video sharing service itself by increasing the value of Plus, Chrome, Android and many other properties.

So the big question is not is $19 billion too little or too much. The big question is: where are the biggest untapped reserves of attention online? Where would you drill if you had money to spare?


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