By now you have surely heard that Facebook has acquired Instagram, a photo-sharing app for the iPhone, and now Android. You may have also heard it's rumored to have spent $1 billion on it. And if you're anything like me (Lord, save you!), you may also be shaking your head with sorrow and confusion.
To be sure, I like Instagram a lot. It gives me another reason to think creatively. I follow a small group of actual real-life (RL) friends and I enjoy seeing what they share throughout the day. And I've had fun using its photo filters to change the views of my keys, sink, bathroom cabinet, and coworkers. Good times!
Are those good times worth $1 billion, though? No. Of course not.
Let's go over some statistics: Instagram claims over 30 million registered users. It's a free app. It isn't ad-supported. It has no revenue stream at all, in fact. Since it launched in 2010, it's raised $57 million, which valued the company at $500 million.
Even $500 million seems way too high for a startup with no business model. Yet, somehow, Facebook has now plunked down double that to acquire it. Why?
There are plenty of theories and justifications floating around. Some, like BusinessWeek, suggest it's not a big deal for Facebook to spend $1 billion (how nice), making this a strategic move by Zuckerberg to acquire an audience. Om Malik at GigaOm chalks it up to Zuckerberg's fear of Instagram, a service that was able to do mobile-photo sharing in an attractive way that Facebook couldn't. As Malik writes:
It has created a platform built on emotion. It created not a social network, but instead built a beautiful social platform of shared experiences. Facebook and Instagram are two distinct companies with two distinct personalities. Instagram has what Facebook craves - passionate community.
All of that may be true. But it's still a reckless purchase, and it's something to take note of as Facebook prepares to go public.
Zuckerberg goes out of his way in his announcement about the acquisition to say that Facebook doesn't plan to do "many more" of these types of major acquisitions. (Read: Don't worry, investors, we won't continue to be this careless with our money.) But should we take his word for it? Or does this acquisition just prove that Zuckerberg will spend recklessly when he's fearful of the competition, and when he doesn't think his own engineers can build something better?
Furthermore, Zuckerberg may have purchased a "passionate community," as Malik says, but that passion may begin to dissipate under Facebook's rule. (The New York Times today already pointed out a series of posts from users planning to quit Instagram now that it's Facebook-owned.)
What's most disappointing of all, though, isn't that Facebook is irresponsible. This much we knew. It's that all of these years after the dot-com bubble this pattern of reckless spending continues. One overvalued company buys another, and so on and so forth, and no one is being held accountable for their true ability to establish business models and earn actual money.
Instagram is a lovely service, and its founders are now multi-millionaires. So good for them. But it's simply delusional that a two-year-old company with no business model should be worth a billion dollars, and it highlights the fact that the tech industry hasn't learned its lesson.
All in all, my message to Facebook and Silicon Valley can best and most appropriately be summed up as follows:
Nicole, I differ from you in one respect-- I find the phenomenon exasperating, but not overly worrisome. You need to read Extraordinary Popular Delusions and the Madness of Crowds. It was published in 1841 by Charles Mackay, a Scottish historian. I was required to read it when I was working as a consultant during the dot-bomb era, and it proved to be immensely helpful to me.
Using examples that go back to the middle ages, Mackay runs through the history of just about every investment fad that people have spent enormous amounts of money to pursue. The stunning thing about this book (which is still in print after nearly 175 years) is how the events of the South Sea company mirror the statements and events in technology.
When I hear someone explaining the value proposition of a startup-- and he's using the language used to describe tulip bulbs in the 1630's-- it's hard not to smirk. For every time that a proponent is right-- the investment is a game-changing pardfigm where normal rules do not apply-- there are 500 where this is self-serving nonsense, if not chicanery.
This facet of human nature hasn't changed in hundreds of years, and I doubt it ever will. P.T. Barnum was right.
What I do find worrisome is the current sentiments that these companies (a) should get exceptions to the law in order to bilk investors (which is what the JOBS Act does) and (b) that we should do anything to rescue them when they fail.There's a difference between making loans to a manufacturer (so we don't have to buy all our cars from other countries) and insuring that stupid investors don't go bankrupt and pay the price of their stupidity.
That is something new (that we're enacting laws on it), it has changed and it could, coupled with this nonsense, take the economy down. That is what keeps me up nights. It's fine with me if Mark Zuckerberg wants to waste a billion of his idiot investors money. It's problematic when those investors come to the taxpayers wanting to be made whole.
RufusJones, thanks for weighing in. That's the point I'm trying to stress. The fact that we've gotten used to people spending money recklessly, money they often don't have, on companies and other services that have no value, doesn't mean there's not something deeply wrong with this trend. The fact that we haven't learned this after the dot-com crash and after the global financial collapse is deeply worrying.
I don't buy the notion that FB felt in any way threatened by Insta. I get the feeling we're all missing something about the funds changing hands in this deal. I'd love to see a diagram that connects the players in this little financial shell game.
Which does not mean she isn't correct both times. Knowing that a bunch of idiots are willing to pay exorbitant sums for companies doesn't make it a good idea. (see Bomb, Dot and Bonds, Mortgage)
This acquisition is a little different, in that some people (including Facebook) felt Instagram was a competitor to Facebook. For $1 billion-- money extracted from the pockets of the nitwits who will buy the IPO-- Facebook eliminates a thorn.
But the people seeing this as "adding business value"-- anything more than chloroforming an opponent in its crib-- need to lay off the crack.
Jw: Hmmmm, but Facebook is still way overvalued! Also, Facebook at least had the time to implement a revenue model before making moves to go public. Instagram, on the other hand, received a billion-dollar buyout before earning a penny. That's crazy.
Need I remind you Nicole that we had a very similar discussion when I was on the side of zeal and optimism for facebook's $15 Billion valuation? You said then too what you said in the above blog and their business model. :))
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