Where's the money in Instagram? The content is practically worthless and their only real value is in their userbase. Even though I use the Instagram client, most of the time I see photos, they come through Twitter. So that also reinforces for me that any value is in the users and not the actual content, which is mostly crap.
I'm more convinced that we're in a 2nd bubble now more than ever.
It turns out what Google was buying was a chance to maintain their lead in how people were going to use their computers.
Facebook is now buying a chance to maintain their lead with how people are going to use their phones.
There's almost no room for that kind of content from a photo sharing system.
Preventing Instagram from developing into something that has a negative effect on Facebook. It's a "keep your enemies closer" move.
Now to put the question in context if you have a small company that is worth, say $500,000, then 1% is $5000 you might spend that much (in cash alone yearly) as "insurance", say for property/casualty or liability. And you would pay that no matter what the business climate if you perceived a risk to your business, right?
But it could indicate a bubble simply because if the market is up people are more likely to overpay for anything because they feel very upbeat and enthusiastic about the future.
So paying a large number (and 1 billion is a large number and not trivial no matter how you slice it) would be more likely to happen in a bubble.
But there are to many variables in this that are not know to draw a definitive conclusion.
That said my feeling is we are in a period of irrational exuberance.
Whatever value Instagram has for Facebook, it probably has at least double that value for Google, who could buy it just as easily. By paying a premium and showing major interest first, Facebook preempted an opportunity for Google to get some traction in the social space. Very smart move.
For a fraction[1] of that they could have cloned the software pixel-by-pixel and weaved it in with facebook in a way that the original instagram couldn't.
I have trouble believing instagram was about to turn into an 1 billion dollar threat.
[1] Understatement of the month
I agree. So far I've mostly dismissed talk of "the next bubble", but this pretty much solidifies it.
Of course no one knows when the bubble will burst, so I guess investors are making as much money as they can before it inevitably does burst. It's a classic case of the "greater fool theory" http://en.wikipedia.org/wiki/Greater_fool_theory
To me this just confirms that people who talk about bubbles now weren't here for the last real tech bubble.
In turn, Facebook, implicitly assumes that the greater fool from whom they will make money from this deal is the public who will buy shares when Facebook goes IPO. Because with $1 billion in profits for 2011, if the market values them at $100 billion, that will be a P/E ratio of 100. Even if they double their profit in 2012, their P/E ratio will still be 50, which is astronomical.
When people put huge money into things that have low value from a business fundamentals point of view, just because they think they can sell later on to someone else to make a huge profit, I think that's the very definition of a bubble.
If I buy a bathtub from a bathtub warehouse at a 50% markup am I the 'greater fool' or do I just like hot baths?
> Because with $1 billion in profits for 2011, if the market values them at $100 billion, that will be a P/E ratio of 100. Even if they double their profit in 2012, their P/E ratio will still be 50, which is astronomical.
And then if it doubles again it becomes 25, and then it becomes 12, and then it becomes 6. only 4 years away to Facebook being a blue chip stock - so all that the 100 PE ratio is telling you is that they do believe that revenue and income will grow pretty quickly over the next few years.
The last bubble got messy because public markets were being used as what private equity does today. The public was shouldering the risk profile of a big VC firm that filled in all the shitty deals.
Those are some BIG ifs. I'm going to contrast Google and Facebook to explain why I think Facebook is overvalued.
When Google was in it's fast growth phase, it could perhaps justify a P/E like what Facebook has now - because of the way in which Google makes money. For roughly 1 out of every 14 Google searches, a user clicks a Google ad. As the amount of people on the internet grows, that means the amount of searches grow, meaning the number of ad clicks grows in tandem. Even today, with all the smartphones and tablets and people from the BRICS coming online, Google only has a P/E of 21[1].
Now contrast that with the way in which Facebook makes money. Targeted ads. The revenue they generate doesn't grow in tandem with Facebook's userbase. Granted, the revenue goes up as companies chase the eyeballs, but it seems to be a mixed bag of results selling ads on Facebook, so some companies aren't going to get the results they want and will quit Facebook. People there don't go there primarily to look at products (completely different to many Google searches). And of course some companies will get great results, but the overall point is that there isn't a direct correlation between user growth and revenue growth.
Ah!, you say, but there are other ways for Facebook to make money (off the top of my head):
a) Premium celebrity pages (pay Facebook for a prominent page to get fans)
b) Somehow charge for user accounts, maybe for premium features
c) Selling user data to third parties
d) Zynga etc. profit sharing
e) Others
Maybe they could make some revenue from premium celebrity pages, but not enough to justify a 3-figure P/E, IMO. Charging for premium features would be highly controversial, if they did this it would be a sign of desperation and a complete departure from where they began. They probably will do some form of c at some stage (don't worry, your data is completely anonymised!) but users would probably abandon ship to competitors in droves if they did. They will continue to make money from social gaming, but it's fickle and short-lived, plus Zynga is trying to wean themselves off Facebook to grow their own revenue.
Overall I think they will continue to make billions from ad impressions and social gaming profit sharing, but nowhere near enough to justify a $100bn valuation IMHO. If they bow to Wall Street pressure and really try to squeeze their userbase data for every dime (you could call this 'doing a MySpace', i.e. shooting themselves in the foot), people will leave in droves to the next social hotspot. So it will be 'interesting' to see how they will justify the lofty valuation over the coming years.
This is no different than the real estate cycle in L.A. or South Florida a few years ago, when people would buy and sell condos based on market potential multiple times before the condo was even finished. It all works until someone down the line tries to cash in. It will work for FaceBook and Goldman Sachs, but a whole lot of consumer investors are going to get AOL'd in the long run.
But Google saw the potential in the usage stats. The YouTube search bar was the second most used search bar after theirs.
Similarly Facebook see the social engagement stats of Instagram being similar to their own.
Being popular != being valuable.
To compare it with YouTube is a massive overstatement. YouTube still has ~65% market share. InstaGram didn't even have an app for Android until a week back. How is that even remotely close to YT's domination of the video space?
In that it was a startup acquired by a big company? Yep.
> When Google bought YT it was a small team of people and a pretty nascent product that people really loved, and the usage numbers were out of control.
Like most startup acquisitions, the team size is relatively small and there is significant traction in the market with headroom to mature their footprint.
> They left the product mostly untouched and let it grow on its own. Though there was major criticism at the time, it is one of the best tech acquisitions of the past decade.
This is not going to be one of the best tech acquisitions of the next decade. YouTube helped to propel Google into content. It also helped to commoditise web video in a massive way: reminiscent of the way which Google commoditised search (YouTube is probably just short of being a byword for online video at this point).
Instagram is a photo service in a sea of other photo services. Photography has been around on the web in meaningful ways for a long time. Flickr lost out to Facebook in the community stakes, and Instagram is doing great in whatever-the-fuck market it's in (the share-to-my-twitter-followers market?), but this is not Google acquiring YouTube.
Bookmark this comment. See you in 2022.
You're mischaracterizing Instagram. It's not "a photo service," it's the photo service. 30M iOS users plus 1M new Android users in 12 hours.[0]
Instagram is the main mobile photo app. With this purchase, Facebook strengthens their mobile position the way Google strengthened their content position with YT. The acquisitions are very similar.
(edited for a stronger point)
[0]http://www.forbes.com/sites/anthonykosner/2012/04/07/instagr...
Instagram doesn't have more users than Facebook. Hell, it doesn't even have more users than Flickr (51m) or Photobucket (50m).
Instagram is a small part of the web photo ecosystem.
It's a very peculiar play by Facebook, and not at all comparable to Google & YouTube other than the fact that Google acquired YouTube, and Facebook acquired Instagram. Instagram represents a diversification of Facebook's offering, and one which says "it's cheaper for us to spend $1bn acquiring Instagram than it is to make a compelling mobile photo app to usurp them".
And to go further: I have a Flickr account, I have some Picasa galleries.. I rarely visit those sites except to upload a batch and then go elsewhere.
I use Instagram 5-10 times daily when in transit, on lunch, while watching TV, etc...
Facebook have got 721m users and all the data they need to constitute incredible market research. In twelve months if Facebook couldn't build an app which is competitive to Instagram, and get it installed with ~5.5% of their user-base, I'd be really fucking worried.
Also consider this: Twitter add "Photos" to their filtering options adjacent to "Connect" and "Discover". So you can just click a Photo button and see all your connections' photographs in a stream. Oops, they just went halfway towards creating most people's Instagram experience.
Damn reading comprehension. ;)
To go a step further, consider: Flickr is available on every device (computer or phone) with an internet connection . Instagram was iOS-exclusive until a week or two ago, and yet it managed to reach sixty percent of Flickr's user base size. That's astounding.
--does Android's Camera app have social sharing features?
--does it provide some kind of cloud-based sharing support?
I see the above, plus Instagram's 30M+ user base, as their main benefits.
Here's a screen shot of the sharing options shared via Dropbox.
It's a little faded because the screen shot button combo includes the back button on my phone... not the greatest design.
You don't expect Instagram to double its user base within a year? Maybe even more?