Peter Schiff On WhatsApp And The "Dysfunctional And Distorted Economy"

Tyler Durden's picture

Submitted by Peter Schiff of Euro Pacific Capital,

Two pieces of business news announced this week provide a convenient frame through which to view our dysfunctional and distorted economy. The first (which has attracted tremendous attention), is Facebook's blockbuster $19 billion acquisition of instant messaging provider WhatsApp. The second (which few have noticed) is the horrific earnings report issued by Texas-based retail chain Conn's. While these two developments don't seem to have much in common, together they shed some very unflattering light on where we stand economically.
Given the size and extravagance of the Facebook deal, it may go down as one of those transactions that define an era (think AOL and Time Warner). Facebook paid $19 billion for a company with just 55 employees, little name recognition, negligible revenues, and little prospects to earn much in the future. For the same money the company could have bought American Airlines and Dunkin' Donuts, and still have had $2 billion left over for R&D. Alternatively they could have used the money to lock in more than $1 billion in annual revenue through an acquisition of any one of the numerous large cap oil producing partnerships. Instead they chose a company that is in the business of giving away a valuable service for free. Come again?
Mark Zuckerberg, the owner of Facebook, is not your typical corporate CEO. Through a combination of technological smarts, timing, luck, and questionable business ethics, he became a billionaire before most of us bought our first cars. And in the years since social media became the buzzword of the business world, Wall Street has been falling over backward to funnel money into the hot sector. As a result, it may be that Zuckerberg looks at real money the way the rest of us look at Monopoly money. It also helps that a large portion of the acquisition is made with Facebook stock, which is also of dubious value.
But even given this highly distorted perspective, it's still hard to figure out why Facebook would pay the highest price ever paid for a company per employee - $345 million (more than four  times the old record of $77 million per employee, set last year when Facebook bought Instagram). The popular talking point is that the WhatsApp has gained users (450 million) faster than any other social media site in history, faster even than Facebook itself. Based on its rate of growth, the $42 per user acquisition cost does not seem so outrageous. But WhatsApp gained its users by giving away a service (text messaging) for which cellular carriers charge up to $10 or $20 per month. It's very easy to get customers when you don't charge them, it's much harder to keep them when you do.
Boosters of the deal expect that WhatsApp will be able to charge customers after the initial 12-month free trial period ends (it now charges 99 cents per year after the first year). Based on this model, the firm had revenues of $20 million last year. But what happens if another provider comes in and offers it for free? After all, the technology does not seem to be that hard to replicate. Google has developed a similar application. More importantly, no one seems to be projecting what the cellular carriers may do to protect their texting cash cows.
WhatsApp gives away what AT&T and Verizon offer as an a la carte texting service. As these carriers continue to lose this business we can expect they will simply no longer offer texting as an a la carte option. Instead it will likely be bundled with voice and data at a price that recoups their lost profits. If texting comes free with cell service, a company giving it away will no longer have value. People will still need cellular service to send mobile texts, so unless Facebook acquires its own telecom provider, it can easily be sidelined from any revenue the service may generate.
Some say that texting revenue is unimportant, and that the real value comes from the new user base.  But how many of the 450 million users it just acquired don't already have Facebook accounts? And besides, Facebook itself hasn't really figured out how to fully monetize the users it already has. In other words, it is very difficult to see how this mammoth investment will be profitable.
From my perspective, the transaction reflects the inflated nature of our financial bubble. The Fed has been pumping money into the financial sector through its continuous QE programs. The money has pushed up the value of speculative stocks, even while the real economy has stagnated. With few real investments to fund, the money is plowed right back into the speculative mill. We are simply witnessing a replay of the dot com bubble of the late 1990's. But this time it isn't different.
In another replay of that spectacular crash fourteen years ago, the appliance and furniture retailer Conn's has just showed the limits of a business built on vendor financing. In the late 1990's telecom equipment companies almost went bankrupt after selling gear to dot com start-ups on credit. For a while, these "sales" made growth and profits look great, but when the dot coms went bust, the equipment makers bled. Conn's makes its money by selling TVs and couches on credit to Americans who have difficulty scraping up funds for cash purchases. For a while, this approach can juice sales. Not surprisingly, Conn's stock soared more than 1500% between the beginning of 2011 and the end of 2013. These financing options are part of the reason why Conn's was able to keep up the appearance of health even while rivals like Best Buy faltered in 2013.
But if people stop paying, the losses mount. This is what is happening to Conn's. The low and middle-income American consumers that form the company's customer base just don't have the ability to pay off their debt. The disappointing repayment data in the earnings report sent the stock down 43% in one day.
In essence, Conn's customers are just stand-ins for the country at large. In just about every way imaginable, America has borrowed beyond its ability to repay. Meanwhile our foreign creditors continue to provide vendor financing so that we can buy what we can't really afford.
So thanks for the metaphors Wall Street. Too bad most economists can't read the tea-leaves

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HedgeAccordingly's picture

more inflation .. $100k Kiton suit -

Stackers's picture

Conn's has been dieing for years. Their prices are high. They have pushy comission based sales people and all product inventory is kept in the back and takes forever to be brought forward after you buy it. It's a retail dinasour.

Landotfree's picture

Peter is mad because he missed the boat, again.   He called the housing top but didn't short the market and banks.  

Dude can't catch a break.   Like going to the strip club and forgetting your cash.

"From my perspective, the transaction reflects the inflated nature of our financial bubble."

And Peter your investment advise is based on the exact same thing.   The helicopters are coming... 

"Meanwhile our foreign creditors continue to provide vendor financing so that we can buy what we can't really afford."

Sorry Peter there is no backup system once this one implodes.   The system is simple.... American take on credit... expanding the money supply... buy cheap crap from Japan and China.   In 2007-2009 that system went into shutdown mode... as did the rest of the world.

There is NO OUT!  There is only IN!

jbvtme's picture

tonite is friday. i had two choices. either buff my weathered frame with a shit, shower and shave and hit the trail for cocktails and loose women. or stay at home and snuggle up with the hedge.

jbvtme's picture

who here has ever clicked on a facebook ad let alone even read one? the stock (a rockefeller chimera) is inflated with QE hydrogen and is one of the crippled legs on which this charade is supported.

SilverIsKing's picture

Did WhatsApp turn down an offer for $18B? There has to be a shareholder lawsuit for overpaying. You can't tell me that the sellers wouldn't have accepted a penny less than $19B.

Semi-employed White Guy's picture

Maybe Zuckerweasel and the two WhatApp owners were playing darts and they decided the first triple score would be price for the company.  Somebody got a triple 19, so that's how it was set.   That would be no less sound of a valuation as the official one will be when we hear it.

Temporalist's picture

Farcepoop bought Instantcrap for 70% stock, or $700 million (I think or close to there), in case that wasn't mentioned somewhere.


And to keep things in perspective, WhatCrapp employs 55, Instantcrap employs 13 (maybe more now but even if both employed 200); Eastman Kodak used to employ 17,000, Verizon is laying off 3,200.


Cheering on the demise of their own generation. 


Everything is free apparently and I wasn't aware of it.  Party on!


And I thought waaaaazzzzaaaappp!!! was so turn of the millennium

chrispycrunch's picture

Only without ad block plus. On mobile, users accidentally pocket hit ads

rcintc's picture

Blackberry recently offered up its BBM service for free.  It's the same, you just need to have someone else have the app also - just like whatsapp - the only catch is BBM is free - just not as widespread.

Stuck on Zero's picture

These new bubble stocks carry the same message as the dotcom stocks: "Of course we don't make any money on our transactions ...  but we'll make it up in volume."


irishlink's picture

Face book is not about making money. It is about collecting users and their Data. The goal is 2 billion users world wide and these are the people that gov want info on. The guys who wanted to create a safe messaging system with Whattsapp just sold their soul no matter what assurances they are trying to peddle to their users . Money talks!

game theory's picture

It is the worlds largest facial recognition database...once people realize Facebook can sell that data to anyone, maybe they'll come to their senses and stop uploading images and tagging pictures. Or not.

Spankrupt's picture

On the one hand you have every opportunity to get get lucky....and on the other you get fucked after debauched drunken explanations about dads/moms who didn' give a fuck.

johnQpublic's picture

so if america stops paying , it bankrupts its creditors

like china


Spitzer's picture

You have been reading too much Keynes.


Anything you see that is made outside the US won't be coming in the door as an import anymore. Plus the devaluation that the dollar will experience will make capital investment too expensive.  Borrowing costs for even legitimate endeavors will be expensive. The devalued dollar will not , WILL NOT, improve exports. It will have the exact opposite effect because the US won't be able to afford capital investment.

China won't be the one going bankrupt either. They will take losses on their dollar holdings.


In other news.. That you won't hear on ZeroHedge.

Record spending by tourists has helped Greece post its first current account surplus since official data began.

Figures from the Bank of Greece showed the difference between the money going into and coming out of the country was 1.24bn euros (£1bn) last year.


^Imagine that... With a strong currency !! Fucking Keynes..

Spitzer's picture

@ Landotfree


Peter is mad because he missed the boat, again.   He called the housing top but didn't short the market and banks.

Fail. Peter Schiff did short the housing market, parterned with a hedge fund in 2008. Not that many people know about it but he did.

And Peter your investment advise is based on the exact same thing.   The helicopters are coming...

Bullshit. You don't seem to understand the difference between speculative bubbles caused by central bank balance sheet expansion and banana republic/70's style currency inflation caused by a central bank losing control. The loss of control has not happened yet. That is what Austrians are positioning for.


Sorry Peter there is no backup system once this one implodes.   The system is simple.... American take on credit... expanding the money supply... buy cheap crap from Japan and China.   In 2007-2009 that system went into shutdown mode... as did the rest of the world.

There is NO OUT!  There is only IN!

Ummm.. That statement makes no sense. Smoke another one.

machop's picture

In ZH a comment with lots of Voted Down is really worthy reading. I am serious.



Murf_DaSurf's picture



So whats your definition of "lots" ?

The Vineyard's picture

OK.  OK.  We get it.  We have a non-productive economy.  Bitches.

SilverIsMoney's picture

He's a ZeroHedger lol...

knukles's picture

And confirming all this Happy Horseshit is the Class A-1+, P-1 AAA across by all services King of the Hill Bankruptcy of all Time, TXU, one of the Most Expensive Buyout/Takeovers Ever, which occurred in What of All Industries, but an Electric Utility.

Whoever thought that one up probably believes that Unicorns Eat Rainbows and Fart Big White Happy Puffy Clouds....

El Vaquero's picture

Sheesh!  Everybody knows that Unicorns eat white happy puffy clouds and fart Skittles.  No wonder we're screwed. 

PT's picture

Now roll that episode of The Simpsons where Homer starts his own company in his garage and just sits there all day ...

Kayman's picture


Another of the Fed's drug addicted cheap money whores. Price/Value discovery in the real economy died a long time ago.

Everyone now is chasing the money sloshing around in a sinking row boat.

akak's picture

Funny how they call it "social media", yet those most addicted to it invariably seem to me to be the most anti-social people I ever run across.

knukles's picture

Just think of the lost sales potential if it were called "Anti-Social Media"

Daughter and I took Mrs K out for her Bday dinner at an extraordinarily expensive wonderful magnificent local restaurant out here were we live in the People's Republic.
NYC prices for NYC quality French food.
Which is scarce out here.  CA cuisine is sorta mash-bland-fu-fu type food.

Table next to us a young couple comes in, orders a fabulous dinner, and sat there the whole time with their SmartPhones texting.
The whole fucking dinner.
No social interaction whatsoever.
Absolutely amazing...

There's something very wrong with this.  And just think, any and all information on the web can be redacted at any time....
Pure Orwell come true.

jbvtme's picture

i watch the young coed walking across the verdant campus, eyes intently fixed with both hands gently carressing her iphallus. with gaze cast down a blond lock draped wistfully on her wrist,  her innocent thumbs move like lightening up and down back and forth rhythmically across my keyboard. bout time to launder some delicates...

Yen Cross's picture

  I almost ran over an cart pushing, i-shit listening, two kids a-toting, brain dead breeder, earlier today. Thank goodness I was paying attention, or "Broom Hilda" would've likely become an hood ornament.

    Attempting to navigate the (jungle) Best Buy parking lot to purchase some cheap usb-2.0 flash memory for my 5 year old workhorse laptop, almost landed me in the FEMA camp. ;-)

phaedrus1952's picture

Interesting and astute observation, Knukles.  I am going to do a bona fide, accurate counting of the number of people I see on San Francisco's sidewalks one of these lunchtimes with their eyes glued to their smartphones as they stride along.  It has to be approaching 1 in 4 and rapidly rising.

The other day I saw two young kids sitting side by side in a Costco shopping cart with their total attention fixed on their hand-held tablets.

"Social Media"?  Not the face to face, eyeball to eyeball interaction that I've always  known.

johnQpublic's picture

two anecdotes

drove thru a college town in southern P.A., and every damn kid was walking eyes down on the phone, to the point of crossing the street w/o looking up

being a college town it appeared set up for that



at a of the adults were present

hs seniors and first year college kids

tablet and phone equipped barely communicating

the adults got ripped

kids not old enuf to drive took the opportunity to use all the motorized contraptions available, and stayed up til everyone else crashed to rip around and smoke weed

i got up to piss and saw them

one positive sign of youth i guess

Omegaman2211's picture

And people wonder why there have been so many pedestrian fatalities in SF lately. Go figure.

roadhazard's picture

In the early seventies I used to stand on a corner in the financial district at lunch time and watch the hotties leave the buildings for lunch. I could fall in love several times in an hour. Ah the good old days.

endorush's picture

so you ever fuck any of that hot pussy? or just stand there doin nothin?

RaceToTheBottom's picture

They probably enjoyed the evening immensely.  They sound perfectly matched.  For each, their own

assistedliving's picture


Bouley, Boulud or Jean Georges?  will be at JG Sat nite.  join us for a drink

tdogg's picture

Give em hell Knuckles.

$19b for a company with 55 employees?!?!  That doesn't even own their own infrastructure?!?!




wisehiney's picture

No wonder all the chicks are becoming bulldygers.


El Vaquero's picture


Topping the list, by a large margin is New Mexico, where an act of love lasts just over 7 minutes, according to Nerve, an online magazine dedicated to sex, relationships and culture.


jbvtme's picture

7 minutes?  they're lying...

Harry Dong's picture

There really is a difference between north and south dekota. Who knew?

rustymason's picture

This WhatsApp deal reeks of corruption. Bet you a dollar that some bodies from Faceplant are getting a chunk of that deal pumped back into their offshore accounts. It's a good way for those rat-faced bastards to loot the ship before it goes down.

PT's picture

It's the "new" business model:
1.  Obtain complicit banker.
2.  Borrow money.
3.  Undercut your competitors, even if it means offer product for free or negative for a little while (4 years interest free!).
4.  Hope your banker continues to bail you out while your competitors go broke.
5.  You may want to buy a competitor or two.  Banks or muppets can finance this.  You need to figure out which works best for you and your bank.
6.  Now you have a monopoly, you can jack up the prices and repay your banker. 

Your business is a vehicle by which banksters do battle with each other.

Pseudo Anonym's picture

the service, whatsapp, may be offered free, but the nsa will pay shitbook top dollar for handing over all the captured communication of all the idiots that use it