Zero revenues. 12 employees. One billion dollars. These numbers are scary surreal and shouldn't happen in reality. It's like an egomaniacal Hollywood movie produced by Michael Bay.
Facebook (Nasdaq: FB) announced yesterday that it will pay $1 billion for the social photo-sharing app Instagram, which has the aforementioned stats and has been in operation in all of two years.
The standard pundit analysis offered this: Facebook's photo-sharing capabilities are weak, Facebook needs to defend itself against growing social site Pinterest, and Facebook needs to beef up for the battle against Google (Nasdaq: GOOG). All correct, but $1 billion? You mean to tell me that you are the most powerful social-networking company in the world, and you can't come up with a better photo-sharing app than 12 hackers in pajamas?
The deal will come in a combination of cash and stock and will close later in the quarter, according to Facebook CEO Mark Zuckerberg.
It's all a bit strange, but this is a strange world. Let's keep in mind that Facebook is all of seven years old and is about to launch a $5 billion IPO that may give it a valuation of $75 billion to $100 billion. This could be one of the most successful technology IPOs of all time when the rest of the Western World is mired in a stagnant economy. Those public shares are going to come in handy for deals like this.
Let's make it even more strange: A week prior to the deal, Instagram landed $50 million in financing from Silicon Valley venture capitalists including the elite Sequoia Capital. The valuation on that deal was $500 million. That means Facebook's offer doubled the valuation on the venture investment in one week.
What scares me is that there is no sensible or rational way to come up with valuations like this for companies. Zero revenues, $1 billion. You may as well put some numbers up on the wall and throw darts up at them.
If the private market for social-sharing apps is getting this frothy, what does that mean for the public market? If a garage full of coders can beat Facebook with a photo-sharing app in two years, does that mean there might be more risk in the social-networking market than people think? Yes.
Clearly, social-networking is moving at the speed of light, and as soon as Facebook gets its public ticker symbol, hundreds of startups will be gunning for it -- or at least gunning for its shares -- and building apps that are more addictive than anything Facebook is offering. It's perhaps the most dynamic and competitive technology market ever seen.
And what does that mean for valuations? For startups, it will be great, because they will continue to be in great demand -- if they are hot. But for the public companies like Zynga Inc. (Nasdaq: ZNGA) (Nasdaq: ZNGA), Google, and the soon-to-IPO Facebook, it means there is a lot of unrecognized risk in the market because overnight you can be beaten at your own game.
I can't for the life of me figure out why instagram is so popular. It just offers a bunch of photo filters, basically. Photoshop express (Adobe) has much more functionality, and while it's not a direct photo sharing app, I can just upload my corrected images to Facebook.
And maybe it's just me, but I have become resentful of giving one app after another, including instagram, access to my Facebook account.
yup, develop and app, burn through your VC and then sell for a cool billion. sounds like a plan to me. Why have I spent all this time developing my career.
Seems to me that Zuckerberg is getting cocky about the money he expects to make on the IPO and spending it already, like those mega-lottery winners who burn through their jackpots with pointless purchases.
I used Instagram on my Android phone, it is a cool little app that was widely used by the photograph fans. As Noreen pointed out, there is really nothing special about it.
But I never image someone will spend $1B dollars to acquire it. For Facebook investors, it will be nerve wracking to think a pre-IPO company spending a quarter of its cash reserve on a single app. Maybe Facebook's fair valuation is just about a dozen cool apps.
Once upon a time, I discussed with some friends, why value investing is much simpler (not necessary easier) than growth investing. One guy points it out: value investors make most of their decisions on what has happend - balance sheet, revenue, profit, etc. Growth investors make most of their decisions on what will happen: growth potential, future outlook. As we all know, human being is good at check the facts, but not good at predicting future even everyone loves to predict future.
Zuckerberg just made another prediction of instagram's future, hope he is right.
As Ben Graham once joked: for some people, investment is a successful speculation. Speculation is a failed investment.
I won't say the Facebook is a total scam. But it will be one of the most speculative investment after 2000 tech bubble. I will stay at the sideway and watch for fun next month.
Facebook is a startup, just a gigantic one with lots of buzzes. Mark Zuckerberg is no different from Andrew Mason, the easy money from VC can burn a big hole of his wallet.
In retrospect, it was a smart move for the VC to put Eric Schmidt, looking over the shoulders of Larry Page and Sergy Brin long before Google's IPO. I don't know who will babysit Zuckerburg for the next few years, I won't invest in FB until I am convinced someone will be there, looking after investors' money.
Kinda disagree. Facebook has more than $1B in revenue. That is not a startup. And it's a much better run, mature, company than Groupon. Like, for example, it makes money.
Facebook certainly has the revenue. But does it have the long term strategy, depth of leadership and maturity at the helm to become a long term player -- anmd maintain those kinds of revenues? I think that's unanswered question.
Shortly after the first of the investor lawsuits had been filed against Groupon last week, the Northbrook Patch reported that Eric Lefkofsky told the Northbrook Chamber of Commerce, "It's like giving a 7-year-old a Ferrari. you're going to get a certain amount of chaos."
Assuming he meant that running a public company was like giving a kid a high-priced car he had no idea how to control, then it's a pretty bad sign -- not only for Groupon investors but for anyone eager to get in on the Facebook IPO as well, since the same mentality seems to be pervasive there.
Geez did he really say that? That can't make the investors feel good about the situation. I bet he drives a Ferrari too. Maybe watch to see if he crashes it.
I think you are right. It looks like Zuckerburg is taking things a bit too lightly and spending a bit too much. At this rate if this is taken as an example of how the company will operate in the future the success of the IPO might also suffer.
Out in the "Twittersphere" there appeared to be a lot of blowback on this deal, now that it's clear Instagram will be subsumed by FB and of course they will connect it to your account. A lot of people threatened to stop using it because of the merger -- yet anothe risk.
I'm certain that at the very least, a FB acquisition would reduce Instagram's momentum. It could also result in net shrinkage. A lot of it depends on how Facebook treats the users and what it does to the Instagram privacy policy/Terms of Use. As we know, Facebook has a controversial history in how it treats its users privacy rights.
And then there's the old How Long Will They Maintain Instagram as a Stand Alone App? Look at what Apple did to Siri, and what Google did to Picnik. There are always promises, but the pattern seems to be to break those patterns.
Don't you think by acquiring Instagram Facebook was 1) trying to find a way to capitalize on mobile users (if you recall, it indicated that it makes Nothing from mobile use right now) and 2) circumvent an attack from its biggest potential competitor, Twitter, which has decent photo sharing capabilities? So maybe there was some strategy at play here.
I'm sure there was strategy at play, but what kind of precedent does this set? Are we just going to watch companies drop a billion here and a billion there to eliminate the competition? What ever happened to taking them head on, and coming up with something better (at a cost of far less than a billion!!)
Yes of course this was a strategic decision. But $1B for 12 people? C'mon, if that isn't a collossal admission of failure in internal develpment, I don't know what is!
The price is stratospheric. It may represent in excess of 1% of Faceboo's market cap when it goes public. If that's the case, they are giving away a substantial amount of the company for a photo-sharing feature!
Well some larger group of people (younger crowds) find it to be very valuable. I recently spoke to someone who now considered himslef to be a near-professional photographer because he had Instagram.
But I must give them credit, some of the images I've seen do look pretty impressive, and quickly too.
What next? Social networking is clearly taking over the Net. I would't be surprised if their next move was to pair with online florist take command of that industry
At what point do companies like Apple, Google and Facebook become monopolies? Can they keep gobbling up the competition without interference by regulators? (If you recall, Microsoft was declared a monopoly more than a decade ago.)
So now think about Apple:"With near-control in spaces like digital players (the iPod), tablets (the iPad), online music (iTunes), and ultrabooks (the Macbook Air), Apple's position as a monopoly based on technological superiority and economies of scale. But majority ownership of a market does not a monopoly make. If it did, many more companies would be investigated for monopoly power at one point or another. What generally leads companies to being accused of being a monopoly is when they act in a way that is hurting their competitors.... and competitors are starting to make the case for abuse of power."
If you read that post Scott mentions, you'll end up shaking your head over the obvious narcissism of Steve Jobs. It notes:
The DOJ pointed to Steve Jobs' biography to argue Apple knew that the scheme would result in higher costs for consumers and would remove pricing competition from Amazon. "We'll go to [an] agency model where you set the price, and we get our 30%, and, yes, the customer pays a little more, but that's what you want anyway," biographer Walter Isaacson quoted Steve Jobs as saying.
I know it's bad form to speak unkindly about the dead, but come on! How arrogant was he to boast about such a scheme?
You think Jobs might have used a little more discretion. But you're right: the fact that he didn't speaks volumes about how he perceived himself, and his company.
I think the same thing happens in real estate every day where the real estate agents, no matter how bad the market or who is losing/making money, demand their 5%. Then again 5% is a little less than 30% yeah?
Clearly the way this was valued by facebook must be like they value themselves. Eyeballs are worth more than revenue and the word customer has no meaning. I think Facebook will be proven the be hgihly overvalued if they indeed are valued at $100B. Maybe deals like this will open the eyes of a few of the prospective Facebook investors.
So those Kodak guys in Rochester with a market cap of $72M are really scratching their heads. I am sure somebody in the Company presented the idea since all day they are thinking photos. With smart phones dooninatiing the news every day you'd think the InstaGram idea was presented two years ago. This is driving Kodak crazy.
I don't think Kodak would have ever done anything Instagram-like anyway, even if you gave it to them. They would have messed it up. After all they have their own large photo-sharing site that was shopped around by PE companies with little success.
The point is that Kodak is not an Internet company, so they don't understand the Internet, even if you served it up to them on a silver platter. This is a common occurrence where old-line businesses try to enter new-line business but their core culture is incapable of understanding it.
Maybe you will get ex-Kodak employees to comment. I would bet somebody in the Company came up with the idea two years ago and it was rejected by mgm't.
But then we had the idea for You Tube in 2003 but did not execute.
Like I said, they already have a large photo-sharing site. What is "the idea"? Photo sharing? They already had the idea! It is not about the idea it is about execution.
Back in 2006, even as he was calling digital cameras a "crappy business," Kodak Chief Executive Antonio M. Perez boasted that Kodak was about to reinvent the company's core business model.
He aims to make Kodak do for photos what Apple does for music: help people to organize and manage their personal libraries of images. He's developing a slew of new digital photo services for consumers that he expects to yield higher returns. They include everything from online photo sharing to a rapid-fire scanning system, called Scan the World, that takes shoe boxes full of yellowed snapshots and converts them into crisp digital images organized by the date originally printed.
But the shift from hard product to digital services is a huge challenge. It's "a very hard transformation," says Perez. "History says very few companies have made it." And Kodak was not one of them.
March 2012 - Shutterfly has agreed to buy Kodak's online photo services for $23.8 million. Kodak Gallery, which allows users to store, share, and print images, has more than 75 million users. It's most direct competitor is Snapfish, which is owned by HP, and boasts more than 90 million members in over 20 countries.
Maybe the biggest thing is that Kodak lost its coolness. It was just another big lumbering firm from another age, and kids, which drove the success of Instagram, were more taken with something fresh and new.
By popular demand you can now order prints for same-day pickup at a CVS or Target store near you! (If your zip code starts with a "0" you won't be able to order prints right now. We've fixed this and are just waiting for Apple to approve the update.)
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GROUP PHOTO SHARING Ever been to a party or taken a trip where a bunch of friends took pictures that you never saw? Problem solved -- just start a Group Album, invite your friends to add their photos and voila! Everyone's photos are in one place.
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Obviously Kodak's online photo site didn't have the traction of instagram. But after seeing what Facebook paid, I wonder if Kodak execs are kicking themselves for selling the business for $20-something million.
I watched the video, and ended up feeling a certain amount of sympathy for Kodak. If only it had reacted a little quicker to the obvious shift in the market!
FYI, Phil Harvey of Lightreading.com called me up to do a podcast on this and we had a wide-ranging discussion about Instagram, Facebook, and telecom networks. It was fun, follow if this interests you:
instagram is spawning new businesses. Canvaspop.com, for instance, lets you "Put Instagram snapshots on display" and "Create art with your favorite photo app." It offers to convert the image to a ready-to-hang, archival-grade canvas -- and the App is free on iPhone & Android.
If anyone thinks the Instgram photos are "impressive" because of the use of a photo filter, they don't know much about photography. The images that stand out on instagram are good because they are good shots, not because someone put a filter on it -- and would still be good if the shooter hadn't used instagram!
Agreed. If you look closely, you'll see pros are uploading DSLR shot and photoshop/lightroom edited photos to instagram -- which really defeats the purpose of an app designed for smartphone images.
This whole instagram thing seems like much ado about nothing, which makes the Facebook spend more than questionable. So I can share some photos. Big deal. I've really grown to dislike Facebook. It's like the kid who suddenly grows rich and starts throwing money around without thinking.
FB has become a substitute for real relationships. A lot of people, including me, are tired of:
Being tagged in photos taken without my consent while i picked up the dog's droppings, scratched my ear, etc etc.
Getting friend requests from people I don't know.
Comments from people I barely know but accepted as friends out of sympathy.
Invitations to things I have no interest in.
Chain letters (don't guilt me into thinking someone's life depends on me resending this crap), pokes (what the hell is a poke anyway?) and virtual gifts (send me a real one).
Unrelated applications that want me to give them permission to access my FB (is this the tech equivalent of big brother?)
Quizzes.
Baby photos 9of me) posted by relatives.
"Suggestions" on what to read or like.
Applications that reveal every story I read on the Washington Post or some other publication.
People who insist on seriously ranting about politics or religion. (This is just a stupid social site, not a platform for real discussion!)
People who drag you into one of their serious rants about politics or religion.
Constant redesigns and changes to the privacy settings.
That's quite a list. And I don't know if it's me, but I detect that FB activity among my "friends" has slowed down a bit in recent months. Passion appears to be starting to wane a bit.
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