That Bubbling Feeling...

[sashas]

So, Facebook bought Instagram for $1Bn today.

That's the big tech news story that will be discussed, analyzed and debated over the next one week.

Instagram has no revenues. It hasn't even decided on a revenue model. It has around 30M users, which makes each of its users worth approximately $33.33.

Again, I repeat: no revenues. Not even a revenue model.

Remember the last time this happened - companies raising millions of dollars, selling for billions of dollars - it was 1999. An year later, the bubble burst and we were left holding the pieces of what was once promised as a glorious dot-com dream.

I wasn't old enough to have invested in the bubble then, but a few old timers here certainly would have. Few came out of that without a few bruises or two.

Where do you think the tech industry is headed, given valuations and acquisitions like these? Are we headed towards another crash and subsequent correction? Domain prices crashed catastrophically the last time this happened. Do you see something like that happening again?

Of course, I realize that the internet is much more mature now than it was in 2000. But given the host of issues threatening the future growth of the internet - privacy, free speech, piracy, heck, even gTLDs - how do you see the future panning out?

 

[katherine]

Thanks, I'm glad to hear I'm not the only one with that feeling of déjà vu.

 

[Tia Wood]

If it's true then maybe I should develop something stupid and cool like the fart button so someone will buy me out for billions.

 

[Biggie]

fb is washing money

groupon will be ungrouping


tweets won't be trending



old school will rise again


as the unconnected connect

 

[M.U.]

With all this "connect/socialize" thing going on, I think soon we will see an "unconnect" movement start.

There must be a limit to how connected people wants to be, at some point they will be "full".

 

[sashas]

fb is washing money

groupon will be ungrouping


tweets won't be trending



old school will rise again


as the unconnected connect

I was just thinking about this. The last time a new tech company joined the $100B valuation club, it was Google in 2004. And Google was incredibly disruptive and changed the way we browse for and use information completely.

Same goes for other tech giants. Microsoft brought computers to the masses, and Apple was one of the first to make computers personal.

But what has Facebook done to warrant a $100B valuation or for Zuckerberg to be stood on the podium next to Gates and Jobs? Facebook isn't disruptive or innovative, nor is it making the world's knowledge more accessible (Google) or changing the way we use technology (Apple and MS). My feed is full of dumb pictures and spam. In fact, it is actually helping us become less productive and useful members of the society. Sure, it helps me 'share' Reddit posts faster with friends, but how exactly is that the same as what Google or MS did?

It may have the traffic, but it is no Google or MS or Apple. And it certainly doesn't deserve to be counted alongside them.

 

[ImageAuthors]

As someone who absolutely loathes Facebook as a product and phenomenon, I would love to think that their management is squandering billions and heading towards a bubble popping. However, I fear they have some sort of AdWords-like revenue model in the works, which (given their near-monopoly status in social media) could insulate their budget from all their bad decisions. But I am certainly not an expert in these matters; so this could be a $1 billion bargain, for all a pipsqueak like me knows.

(And, yes, I maintain a Facebook profile, for those who would like to accuse me of hypocrisy -- though I visit it less than monthly.)

I'm assuming their motivation was to maintain the social-media monopoly against Google competition and had little to do with direct profits. If they saw the users associated with this app as a potential leak flowing toward Google, then their buy might be justifiable from a monopolistic standpoint.

 

[stock_post]

each of its users worth approximately $33.33.

I am no geek - But $33.33 per user is the cheapest in my calculation.

Ia bargain every penny is worth spending.

we will know more in the next year or two..

 

[urlurl]

Valuation is in the current user base, loyal user base (will they come back or continue to use) and the user growth rate.

Its all about the "Eyeballs" how many people are looking at you (the site) just like TV networks sell commercial spots.

 

[ImageAuthors]

Maybe so. It's also true that picture sharing is a large part of what Facebook is about. (How many billions or trillions of man-hours are spent by facebook users staring at their friends' pics?) If the app they just bought shares that market space, then it makes sense to acquire them even at a price that isn't immediately cost-effective rather than compete with them -- or risk their company being acquired a bigger competitor that can afford to go all out versus Facebook (i.e. Google).

 

[hugegrowth]

I think Instagram will keep growing like crazy. Young people use it a lot. Take a photo, edit it if you want with their tools, and upload it to share. Very simple and with Android it will grow even more. As for monetizing, it's easy with all the photos that are hashtagged with keywords to base ads on. FB will integrate Instagram with itself and benefit from all the users and photos. FB likely took the growth trend into account and decided to buy before Instagram grew to Twitter proportions. As for a bubble, I don't agree. What happened in 1999 and 2000 was insane valuations on tech companies with no revenue model or hope for revenues due to lower internet users and poor monetization methods. Now there are better ways to monetize and more online users. Chat roulette was a bubble, I think Instagram/Twitter/Facebook have more staying power. Twitter/FB handles are becoming ingrained into company and media advertising you see everyday, it's becoming one of the main ways many people communicate.

 

[sashas]

I think Instagram will keep growing like crazy. Young people use it a lot. Take a photo, edit it if you want with their tools, and upload it to share. Very simple and with Android it will grow even more. As for monetizing, it's easy with all the photos that are hashtagged with keywords to base ads on. FB will integrate Instagram with itself and benefit from all the users and photos. FB likely took the growth trend into account and decided to buy before Instagram grew to Twitter proportions. As for a bubble, I don't agree. What happened in 1999 and 2000 was insane valuations on tech companies with no revenue model or hope for revenues due to lower internet users and poor monetization methods. Now there are better ways to monetize and more online users. Chat roulette was a bubble, I think Instagram/Twitter/Facebook have more staying power. Twitter/FB handles are becoming ingrained into company and media advertising you see everyday, it's becoming one of the main ways many people communicate.

For the record, Instagram has no revenues. It's far more difficult to monetize pictures than, say, videos (since some people have been comparing this deal to the Google-YouTube deal in 2006). You can't insert ads in pictures (well, you can, but your users will murder you for it).

People tend to forget that Instagram's user base is a very, very small niche in the mobile space - iPhone users. It didn't even have an Android app until a week back. And of course, those hundreds of millions without iOS and Android on their phones will never get to access it. 30M might sound like a lot, but is just a pittance compared to the 2-3 billion total mobile users across the world.

 

[hugegrowth]

They aren't buying it for where it is now, but for where it's going. The growth so far is great considering it's all on iOS. Next Android, and next likely all smartphones. Users are engaged and check in every day. They can tie it in more with FB. A competitor won't buy it and have control over it now. If Instagram becomes the gorilla of photo sharing it will be a good buy, and one that FB can afford. YouTube once looked like an expensive buy for Google, but in hindsight it was a great buy.

It's easy to monetize, ads go above or below the photos, or to the side. Advertisers can show their own photos. With all that growing traffic there are lots of options.

 

[grcorp]

The issue I have with instagram is that because it's mostly used on mobile devices, the ads aren't as "valuable" as desktop viewed ads are.

Online advertising is not a sustainable thing to rely upon exclusively.

Last week, I finished reading the book "Controversy Creates Cash" by Eric Bischoff, chronicling his endeavours in making WCW a very competitive wrestling league to WWE in the 1990's and early 2000's. He describes that the revenue model of a successful wrestling league relies on four things, with equal weight on each; TV advertising, sponsorships, merchandise sales, and ticket sales.

Besides the fact that given the nature of the business, multiple streams of revenue were relatively easy to create, it caused the league to be sustainable since it wasn't completely reliant upon one particular thing.

We're currently in an era where people have created what is virtually a subconscious notion to block out advertisements of all sorts on the internet. That, combined with programs such as AdBlock for Firefox, has for some time told me that this will terribly injure the effectiveness of online advertising.

Maybe not right away. But I think it's only a matter of time before it shows in the conversion rates.

What Facebook paid for, in this instance, is the "reach" that Instagram has. It's only worth a billion if you can make money with it.

They didn't make this investment blindly. They signed over that cheque with the confidence that they'll be able to make that full one billion (that's one thousand million!) back, and further profit from it.

Off the top of my head, I can think of three possible revenue ideas for instagram;

1. Paid instagram app for iphone, android, etc. - purchased through the app store, gives them a much wider array of effects, and is otherwise vastly superior to what you can get for free.

2. "Instagram Plus" type of membership, similar to flickrpro on Flickr - way better than the free version, and you pay for that.

3. Offer printed versions of pictures on all sorts of tangible media. This is especially valuable during holiday times, particularly because the special effects on the photos are more "card worthy" than a regular photograph. The novelty of being able to send an "instagramed" photo to, say, your aunt via mail for, say, $4.99, is both inexpensive to the user (since they'd pay that anyway for a card!), and profitable to produce (might cost $0.30 to print with a message, and the same amount it costs to post a letter, which, in the US, as I understand it, is less than $0.50).

You just have to remember, in order to earn money, somebody has to give it to you. It doesn't come out of nowhere.

The only reason someone will give you money is if what you are providing to them, is of value to them.

In the case of advertising, if it's not working, then it is not of value. Then the cheques stop coming.

By providing real value to people instead of smoke and mirrors promises to advertisers, I think this will allow for a significantly more sustainable business model.

 

[hugegrowth]

I would suggest that instead of blocking out ads, people are getting used to ads on their pages. It is just a part of the internet. Younger people who have grown up with the internet don't know anything else but the way it is now (with ads). People also expect that free services have to be paid for somehow.

The average user sees so many ads, most of them will not apply to them. But if you see a relevant ad (e.g.: you plan on registering a domain and see an ad with a godaddy special offer, or you have a sickness and see an ad for something that will cure it), you will click through. Some ads don't even have to be clicked, they are just a reminder of the product so next time you're in the store you might think of it.

People are spending a massive amount of time online so that is where advertisers have to reach them.

On the original topic, I'd say if every start-up app or tech company was selling for a billion every day, that would be a bubble. But there are clear reasons why Instagram sold for that. Back in 2000, EVERY tech public company had market caps that were sky high. Between Dec 1999 and March 2000 a monkey could have made a killing on the stock market in tech companies. It was nuts and I hope to live long enough to see another stock market period like it!

 

[sashas]

The issue I have with instagram is that because it's mostly used on mobile devices, the ads aren't as "valuable" as desktop viewed ads are.

Online advertising is not a sustainable thing to rely upon exclusively.

Last week, I finished reading the book "Controversy Creates Cash" by Eric Bischoff, chronicling his endeavours in making WCW a very competitive wrestling league to WWE in the 1990's and early 2000's. He describes that the revenue model of a successful wrestling league relies on four things, with equal weight on each; TV advertising, sponsorships, merchandise sales, and ticket sales.

...

It's interesting to note that Facebook reported it to be a "cash and stock" deal. There have been no concrete figures as to what the actual breakdown of cash and stock was. I would suspect that the breakdown would be disproportionately high on the 'stock' side because Facebook knows it's stock is overvalued and it can play around with it before the IPO and subsequent market correction.

This is what disturbs me: it's a case of one paper tiger buying another (smaller) paper tiger, just like in 2000.

Sure, Facebook makes revenues and profits. But at $1B in profits, it is valued at $100B - a P/E ratio of 100, which is absurdly high. There is no way Facebook can possibly maintain the same trajectory of growth; it's $100B valuation is unsustainable. Zuckerberg knows this and is hence more than willing to pay with stock.

Two things are very amply clear:

a.) Social ads have terribly poor CTRs. Facebook users are largely blind to ads.
b.) As more people access FB through mobile, advertising opportunities, and hence advertising revenues, will continue to shrink.

Can Facebook really grow at the same speed in the near future? Doubtfully so.

Instagram is essentially playing out a version of the Greater Fool Theory: build something that's not particularly valuable until a greater fool comes along. We saw this theory in practice in 2000, and even in 2008 before the recession and the subsequent correction in domain prices. LLL.coms were trading for nearly $10k around the crash, and terrible LLLL.coms were selling for at least $20-25. In our guts, we all knew that these prices were unsustainable and were essentially built on the premise that some 'greater fool' will eventually come along and pay more for them. When the prices crashed, most called it a recession; I called it a correction.