Facebook bought Instagram for $1 billion. It paid that kind of money for a photo sharing app that can be used for free. Instagram has no revenue. For those of us who have been around the block for a while, deals like this are like déjà vu. We have seen this all before, way back in late 90s. The Internet was beginning to boom. New web-based businesses were supposed to defy gravity. Earnings didn’t matter. All of a sudden we talked about eyeballs and clickthrough rate as the measures of success, without even considering any financial data. The question is, are we seeing this exact same bubble – again?
Here are a few data points from the old bubble, for those of you who have forgotten:
Boo.com spent $188 million in half a year attempting to create a global online fashion store. They went bankrupt in May 2000.
Pets.com sold pet supplies to retail customers. Although sales rose dramatically, the company was weak on fundamentals and actually lost money on most of its sales. This was a fundamental flaw that the company couldn’t make up in volume.
During this first tech bubble several large companies had similar stories. There was WorldCom’s rise and fall: The company filed for bankruptcy in 2002 and former CEO Bernard Ebbers was convicted of fraud and conspiracy.
In the late 1990s it was enough for a company to have .com in the name, perhaps enriched by a leading “e” prefix. The market rewarded companies that were hardly more than a website with no revenue-producing business. Investors as lost money in the bubble because it turned out that many of these companies had no sustainable business model.
This time around, LinkedIn and Groupon are “real” companies. They have a business model. They have real revenues and profits.
Today’s start-ups are smaller and require less up-front funding because of cloud computing. In the late 1990s Venture Capitalists dominated the investment landscape and very often provided the fuel for some of the excesses. This time around Venture Capitalists come into a deal at a later point in time and have a lesser role.
Still, the similarities are striking enough to remain concerned. The social media hype leads to companies that try to “jump” on the social media bandwagon. If you throw a stone on a street corner it’s hard not to hit a social media expert. The job market in Silicon Valley is red-hot again. And certainly valuations have sky-rocketed. LinkedIn went public as one of the most expensive companies in America based on the ratio of its market value to its annual sales. Facebook is on a similar trajectory.
While today’s companies such as LinkedIn, Groupon, and Facebook are real companies, investors can still lose real money just like they did in the 90s tech bubble.
So, did Mark Zuckerberg do the right thing? Instagram has grown to over 40 million users. It went from 30 to 40 million users in only 10 days in early April of this year. It recently launched on the Android platform. Now it has access to another half a billion users. There is plenty of room to grow. Facebook saved itself time and headaches. It bought the competition while it was able to do so. Mark did what Mark had to do. The rest of us, including Facebook’s board, will watch what’s happening next.
Turnarounds are not for the fainthearted among us. Turning around a troubled entity is complex. There are many stakeho
I do think we’re going through another dotcom bubble, but I think it’s different this time. By default tech attracts a lot of speculators because it’s always on the cusp of future innovations and investors want to get in early on that. Likewise I think some speculators way overdo it, like even Twitter has a several billion dollar valuation and they’re still losing money. Yet, people with money at stake are willing to take the risk that they will become wildly profitable. Ultimately I think the vast majority of startups will fail but it doesn’t deter from the American spirit and drive to strike it rich.
Personally I think Groupon will fail. They are losing money and there’s way too much competition in daily deals now. Separately, I don’t understand how LinkedIn or Pandora are valued so high. Those are just my opinions.
The concept that tech is on the cusp of future innovations because investors want to get in early is a very interesting thought. Certainly, the promise of hypergrowth is very tempting. Tech shares this with only a few other areas such as Biotech.
The purchase of Instagram will undoubtedly save Facebook some R&R money, but will this put them on the cutting edge of smart phone apps? If so, for how long? Seems Facebook paid a lot of money at a time when smart phone technology seems poised for the proverbial “next big thing.”
Very interesting article. I was working at Hollywood Video when they purchased Reel.com for a ton of money. That ended up costing the company a fortune, and it never fully recovered.
I think Zuckerberg didn’t make the right decision. Instragram is a fairly new company, and how does he know if it will perform well enough to make money?
Very valid and important information in this article that I agree with about the comparison and differences on the internet landscape from the late 90′s to now 2012. As far as Mark Zuckerberg is concerned, I don’t really trust him myself, but I think has very strong business acumen and knows what he is doing for increasing his profits and business portfolio. Nicely written article.
I think Zuckerberg didn’t make the correct call. Instragram is a fairly new company, and it’s unclear how they ever will make money. Let alone be worth a $1B investment.
Mark Zuckerberg did the right thing. Instagram has grown in a very short period of time.
I have always felt like Facebook is taking over the world, and this latest stunt with Instantgram only helps to prove my point. I look forward to the day when Facebook no longer has its claws in basically everything, if that day ever comes.
This article is very true and I believe that Mark Zuckerburg did not make a very wise decision. He should have left Instagram as its own company, perhaps consider an investment like with Zynga and then see what happens. $1B is a lot of money to flush down the drain.
In macro economy terms we called it as business cycle. You have provided Very valid and important information in this article that I agree with this I think we are going through another dotcom bubble, but it may be different this time. I think the vast majority of startups will fail but it doesn’t deter from the American spirit and drive to strike it rich.
I don’t think we have another dotcom bubble. As far as I am concerned these are legit companies making strategic moves (Facebook and Instagram). Things go faster in the social media world. Profits will follow which should take care of some of the concerns voiced in this article.
Successful companies acquire other businesses. Buying Instagram was a strategic move. It won’t be the last. Certainly it looks like an expensive deal, but hey. I believe that facebook will be a bit more conservative once they are public.
Facebook seems to be growing with new services and features added all of the time. I don’t see anyone else coming in close. So, who cares that they spend $1B. They can afford it. They took another company out of the race that might have been too big to swallow in a year from now.
Was it worth to buy Instagram at $1 billion? It seems too much as because Instagram does not have any income source. If we consider this is as a strategic move from Facebook it’s still questionable. Just think what they could have done with that kind of money instead. But I still dont think we should compare this incident with 90′s tech Bubble. At that time many fairly new companies with no transparency and visibility were flying high. But here we all know what facebook is and how much impact they have already made in the economy. So i think its not justified to be judgmental right away. But i do appreciate your point.
Eventually I think many online companies will fall short but it does should not discourage anyone from trying. We are still in the Golden Age of the internet. Anything is possible. Personally I think Groupon will fall short. They are proned to loose money and there are way too many competitors.
Facebook is a veteran in this platform and Mark Zuckerberg is experienced enough to know what to do in this dotcom bubble period. If the bubble burst Zuckerberg is the person who will be seriously affected. So let us wait and watch what is coming next. Instagram will surely succeed in near future as everybody is eager to sharing photo than anything else. Anyway, your article is very good and informative. Eagerly waiting to see something more like this.
Instagram can bring many more customers. It’s unclear how this translates into revenue. Facebook as a business needs to spend more focus on monetizing customers. Yet, as a consumer I like it that way it is.
I do think that Zuckerberg made the right decision but took huge risk. Most people nowadays love to take photos and what better way than to share it with friends on families through facebook, why? because its simple and easy. Instagram is also fun to use and user friendly, you take a photo, edit and share it. What I love with instagram is its very simple to use. Most of my friends in facebook usually post their pictures through instagram.
I think Zuckerberg is a very innovative young man. I think he knows exactly what he’s doing and while it’s still too early to reveal his game plan, I’m pretty sure he has some type of plan in the makings. What seems like a risk to others, just may be part of the game plan, he has wowed us with his ideas so far, whose to say he’s not doing that now?
i think facebook did the right decision and instagram will be popular with facebook and in another year zuckerberg will made decision to take over another site to grow his imperium
I really enjoyed reading this article! I just think that Facebook will move on and become more profitable. They did the right thing.
zuckerberg is obviously pretty smart at what he does. Naturally, instagram will fly high to begin with, and time can only tell how successful it will be. My kids are all over it, and seeming to appreciate it. And that is saying a lot.
Seems to me that the instagram buy was more about avoiding competition than investing in the site. For a lot of people, Facebook is mostly a photo-sharing site, sand Zuckerberg doesn’t want to lose those users to instagram. Especially since instagram is a much better phone-based app than Facebook. Now Facebook owns instagram and can slowly integrate it into their main site.
Facebook is turning into a powerhouse. They just bought a whole bunch of patents from Microsoft. They are redefining the internet.
It seems like a smart merger to me, but will it pan out to be a success. Here is an easy option: Zuckerberg could put ads all over Instagram to recoup the investement, but then: That’s not his style.
Facebook has been a very positive influence for the global online market. I don’t see a bubble. This is real.
You make some valid points. I’d like to think that we learned something from the first tech bubble. However, one can’t help but notice how many companies have been bought recently for what seems like astronomical amounts of money. Instagram may turn out to be a stroke of genius move by Mark Zuckerberg. Then again, it’s difficult to shake the feeling that he only needed a new toy to play with, a very expensive toy.
This was a smart deal. Instagram will be popular with Facebook.
Facebook had had a tremendeous growth spurt. But the current model can only go so far. I think new ideas will be needed to sustain growth. Now, how instagram makes a difference is unclear to me. They don’t add revenue to the picture.
I don’t see this as a bubble. I see idea people creating great websites and if they are liked by one of the big competitors out there then that site may make them some money. Of course there will always be sites that bloom then fail, but, I see the internet as still a growth envirnment that has great potential.
Personally, I don’t think all of this is sustanable unless online companies are able to turn a profit. I was watching a news report on 60 minutes about Groupon the other day and the report stated that Groupon was actually losing money. All this craze about online social media websites is worrying; we might really be seeing another dotcom bubble burst.
Was pretty shocking to hear that they bought Instagram for so much, as you mentioned it really has no source of revenue and from what I’ve seen it’s just a small piece of software that does nothing more than add a few photo filters. In end, I think facebook could have made their own filter software for much less, but then again people may have just looked at that as an Instagram ripoff. Really interesting to think about.
I think that facebook made a rather (for lack of a better word) stupid move. Buying a NEW company, that was making no revenue, and at a cost of 1 billion USD. What where they thinking? Sure instagram had lots of download on the app store its first month, but how many other apps have we seen that where on top one week and gone the next. face book might be able to make some money back through premium features and ads, but will it cover the start up and up keep cost, we’ll have to see. I personally think its going to become a huge money pit for the company.
I honestly believe Mr. Zuckerburg’s motive is staying on top, regardless if it’s through Facebook or even Instagram. I am aware that Instagram is very popular right now, as is Facebook. He’s probably afraid that something could be more popular than Facebook so if he has control, he doesn’t have anything to worry about. I think it was a bad decision, particularly because of his motives. He bought Instagram out of fear. This is something that can turn out to be a bad investment because smart phone apps will be “in” one minute and out the next.
Very interesting observations. let’s see after three months (one year is too long in today’s media world!), whether Zuckerburg made a wise move or a stupid one. Depends on who else enters the arena with a new app!
We saw similar behaviors from AOL which had similar characteristics to FB at the time. The company made markets by offering .com’s distribution for steep VC backed carriage fees combined with a platform that drew incredible audience metrics. Along with bitter competition from Yahoo and MSN, valuations were multiple $100M’s for M&A and multiple $B’s in the public markets. Ultimately for all three, it came down to their inability to reinvent themselves which drove the acquisitive behavior in the first place. Few acquisitions have retained a fraction of their purchase price. Ultimately, you must drive cash-flow or trigger an incredible sustained emotion to create value.
I do not believe there will be a mass tech bubble 2.0 primary due to the fact that the tech bubble 1.0 was due to the hype around .com which lead to a huge number of tech IPOs as well as marketing hype from established tech companies (remember “we put the dot in dot com” from Sun. ha!) … in other words, we’ve already seen that trick once.
However, at the individual case level, I do see Facebook as being similar to AOL but based upon a more finicky business model. Facebook offers an engaging (and maybe trendy) service for free to the end-consumer with the expectation that they will build enough brand awareness – which they have accomplished – to which they can apply revenue mechanics – which is business advertising (valued by the size of the audience). However, every time I see a “Like” us on Facebook in an ad it harkens back to seeing “AOL Keyword: “. So, similar to AOL (but in a more volatile manner), the entire Facebook model solely rests upon millions of active eye-balls – what happens to that $100B valuation (on $1B profit) when the eye-balls move to the next cool thing (as the youth will do / have done so parents can’t stalk them) or, more probable, people simply loose interest (in what I’ve had for lunch or what airport I’m going to or what my child accomplished at school this week)?
An interesting sidenote to this is the recent article showing the lack of trust Facebook users have for ads and links that originate on the site.
http://www.slashgear.com/facebook-has-trust-issues-15228356/
I know that I only click on links from people I know and trust, and even then only if the links seem like the kind of thing they’d post. This seems like a real issue FB needs to solve as they move ahead.
There are still quite a few of us sitting on the sidelines weighing the options and few of us doubt the “genius” of Zuckerburg.
When Microsoft bought Hotmail – I think it was for $400MM – a company with zero revenue, Steve Ballmer justified it as a cheap insurance policy.
I think the same may be said about Instagram (though whether it’s cheap is certainly debatable)
Its like you read my thoughts! You know a lot about this – great read.