Quoting CNN presenter Piers Morgan, “Only in America”: Instagram – a two-year old, 13-man strong company, with virtually no dollar of revenue – has just been purchased for 1 billion dollars by Facebook. I don’t know about you, but I really need to pay more attention to my programming skills.
Some reporters and analysts have stated that this move is indicative of a broader trend: the growth of a technology (or dot com) bubble, similar to that which grew in the late nineties, and burst between 2000 – 2001. I beg to differ for the following reasons:
1. This Is Not an IPO: The dot com bubble of the late nineties was characterized by public companies that saw their market valuation rise rapidly even though they hadn’t realized a dollar of revenue, and had no clear plan about how to do so. Nevertheless, they were grossly overvalued by the stock market simply because they were ‘dot coms’, or companies that were part of the internet revolution, or New Economy as it was then called. This scenario is in no way being repeated with Facebook and Instagram. Instagram is not going public; it is being bought by a single entity, Facebook, which is also private, and already profitable. This means that the value of Instagram has not been set by the widely varying fluctuations of the stock market.
2. Facebook Is Not Buying Instagram for Eyeballs Alone: Another common trend that was observed in the previous dot com bubble was the attachment of excessive importance to a product’s user base, also referred to as eyeballs. The thinking then was that these eyeballs could always be monetized through advertising, even though that wasn’t always the case. Again, this trend is not indicative of what is going on with Facebook. Instagram currently boasts of about 35 million users, 30 million on iPhone and 5 million on Android, and this is a compelling reason for its purchase, given that it is only 2 years old. However, it has other attractive propositions for Facebook. Instagram makes mobile photo editing and sharing much easier than Facebook’s mobile app. As such, it is becoming a social network in and of itself, and this is posing some significant threat to Facebook, who in earlier years gained a lot of traction due to its photo sharing capabilities. I feel it is a good move by Facebook to counter this threat. Also with proper integration, Instagram could give Facebook its much needed traction in mobile devices, the next growth frontier in social media.
3. Instagram Could Be The New YouTube: Most of us may not remember this, but when Google bought YouTube for $1.65 billion in 2006, YouTube also couldn’t boast of a dollar in revenue. Still, it has grown to become the behemoth of online video streaming that it is today. I doubt that few will describe Google’s decision to purchase as ill-conceived. Instead of second-guessing Facebook’s intentions, i’ll suggest we sit back, relax, and see how the story plays out. All I can say for now is congratulations to Instagram founder and co-founder Kevin Systrom and Mike Krieger, who have netted $400 million and $100 million dollars respectively for two years of work. I wouldn’t mind trading places with you two good sirs.