3 Reasons Why Facebook Buying Instagram doesn’t scream “Technology Bubble”

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.


2 thoughts on “3 Reasons Why Facebook Buying Instagram doesn’t scream “Technology Bubble”

  1. Very short ctritique:

    1) Facebook will be an IPO. Time will tell if it survives.

    2) In 2012, Users on smartphone = eyeballs. I dont even use most of my apps anymore. Advert COs will soon realise this.

    3) Youtube is hardly a buisness model. It might be popular but i dont think it makes much money for Google. (I will stand corrected if i see numbers otherwise, but from what i’ve read they still make more than 95% of its money from the search engine)

    And for a final bonus point

    4) COs like Google and FB – those which dont provide me with a hard product and/or are dispensible are in my opinion builiding bridges on quicksand. Let me explain this –

    A prodcuct/ service needs to be indispensible (relevant) and/ or long lasting (so that even after its prime consumers who earlier bought in need service) Companies like Apple, MS are more relaible. They make a product which has a longer lifetime. (also the smartphone is not going away). Google atleast is arguably important considering people have grown comfortable with the search engine and have no need to look away (altho its recent privacy issues might mean that people just might start). Even companies like LinkedIn for that matter provide a product which is valued by people who buy in.

    The rest is just fluff. No one needs FB. No one needs youtube. They are more for enterainment than anything else. While there is always market for fluff – the type of fluff changes all the time. FB is not muhc diffrent than a Britney spears album in tht respect. It’s the flavor of the month (year).

    Ergo, Google is trying to come up with products that matter. The google bulbs, glasses and what not! I dont see FB doing it. Having said this, i dont want to put a date of expiration on FB. But i will be surpised if it is still relevant 5 years down the line (unless of course it becomes smarter and makes something worthile with its money)

    1. Hi Ravish,
      A comprehensive critique indeed. Much appreciated sir.
      You touched on a number of things:
      1. Facebook IPO: This doesn’t detract from the fact that Instagram is being bought with a combination of equity, and cold cash. The deal is not all fluff. I can’t argue with the fact that only time will tell if FB survives, but I strongly believe it will; I think its market position if fairly defensible for at least a couple of years.
      2. Smartphone Usage: I also don’t use too many apps on smartphones, but I can tell you that we are the exception and not the norm. People are pecking at those things all day everyday, and there’s data to prove it. The advertising dollars are definitely migrating to mobile.
      3. You’re right Google still does about 95% of its revenue from advertising. However, my point about YouTube is that it is a viable platform today, arguably the leader in online video publishing. I don’t know if they’re profitable right now, but I strongly suspect they are. Even if they are not, they provide google with another viable avenue for gathering the sea of data that it feeds into its advertising monster.
      4. I don’t agree with you that no one needs FB. It has become an integral part of most of our lives. While a new upstart may overthrow FB tomorrow, the fact is that we now have a need for social interaction in the digital space that will not go away anytime soon. In this sense, I’ll argue that FB is a product that matters.
      Thanks for your thoughts. Keep ’em coming 🙂

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