In my March 22 blog post of last year entitled "Plus ça change....," I explored the Social Media Bubble that was rapidly building. Well, that bubble is now in full manic froth. I feared that this sector of the market would rhyme with the Internet mania of 1999. It is April of 2012 and my fears have come fully to fruition. Facebook has not even priced its IPO and the company has purchased Instagram -- basically a popular, virtually pre-revenue photo sharing service with roughly 13 full-time employees -- for $1 billion in cash and stock. Ouch!
I knew the social media bubble would end badly and that companies would eventually do desperate things as advertising dollars grew tighter and capital dried up. These events eventually unfold when companies and investors start asking for real ROIs, but I don't think we have quite reached those points in this cycle yet and I thought Facebook had solid discipline and sufficient cash to avoid desperation. Moreover, I felt Facebook was in a better strategic position than many of the other companies in the space. For example, I thought Groupon had a business model that was more readily susceptible to competition and less defensible; it did not have the potential for really high gross margins like Facebook and Twitter. I expected desperation from them. And even Twitter did not appear to have the stickiness and the time investment and engagement of its users that goes along with the Facebook model. So I really did not expect Facebook to be the first company to do something silly like this. I expected Facebook to be one of the last companies to fall prey to this type of deal -- not the first. (I know one can claim that Zynga's deal for OMGPOP for $200 million was the first over-the-top social media deal, but I don't think it is in the same league.)
The really disturbing question is why did Facebook feel so compelled to pay such a high price for this company? Instagram is the type of app that Facebook certainly could have reproduced itself in a matter of months with engineering talent it surely could have bought. Such an app then would have been specifically tailored to the Facebook service in a mobile and desktop environment on both the iPhone and Android platforms. Facebook's user base is incredibly large and how many Instagram users are not already Facebook users? I cannot imaging Facebook is picking up too many new eyeballs with this acquisition. So what if Google bought the company and Google+ got the service. A bigger competitive threat to Facebook is perhaps an aggregator that enables users to use one interface to interact with all social media services and monitor them all for you as your personal assistant or agent. To me the Instagram deal really smells like Mark Zuckerberg's ego. He just got it into his head that he wanted this baby and he was willing to pay whatever price to get it. Since Mark Zuckerberg effectively controls Facebook through his voting block, he can accomplish whatever goal he sets his mind toward with the company.
The fallout is just like it was back in 1999. If Instagram can grow that quickly to 30 million users then some other company can figure out a way to grow that quickly as well and there will always be an excuse to pay up for growth until one cannot do so any longer. That is what happened in 1999. And that is what is happening again now. And just like in 1999 the numbers will assuredly trickle down as well. If Instagram is worth $1B for 30 million users, the next company with 5 million users will be worth at least $166 million...and so on. Eventually, you simply cannot justify the numbers, however.
News Corp. only shelled out $580 million to overpay for MySpace in 2005. Specific Media bought MySpace for $35 million 6 years later. I guess Rupert Murdock and his shareholders got their lession in overpayment for a bargain basement price!
I knew the social media bubble would end badly and that companies would eventually do desperate things as advertising dollars grew tighter and capital dried up. These events eventually unfold when companies and investors start asking for real ROIs, but I don't think we have quite reached those points in this cycle yet and I thought Facebook had solid discipline and sufficient cash to avoid desperation. Moreover, I felt Facebook was in a better strategic position than many of the other companies in the space. For example, I thought Groupon had a business model that was more readily susceptible to competition and less defensible; it did not have the potential for really high gross margins like Facebook and Twitter. I expected desperation from them. And even Twitter did not appear to have the stickiness and the time investment and engagement of its users that goes along with the Facebook model. So I really did not expect Facebook to be the first company to do something silly like this. I expected Facebook to be one of the last companies to fall prey to this type of deal -- not the first. (I know one can claim that Zynga's deal for OMGPOP for $200 million was the first over-the-top social media deal, but I don't think it is in the same league.)
The really disturbing question is why did Facebook feel so compelled to pay such a high price for this company? Instagram is the type of app that Facebook certainly could have reproduced itself in a matter of months with engineering talent it surely could have bought. Such an app then would have been specifically tailored to the Facebook service in a mobile and desktop environment on both the iPhone and Android platforms. Facebook's user base is incredibly large and how many Instagram users are not already Facebook users? I cannot imaging Facebook is picking up too many new eyeballs with this acquisition. So what if Google bought the company and Google+ got the service. A bigger competitive threat to Facebook is perhaps an aggregator that enables users to use one interface to interact with all social media services and monitor them all for you as your personal assistant or agent. To me the Instagram deal really smells like Mark Zuckerberg's ego. He just got it into his head that he wanted this baby and he was willing to pay whatever price to get it. Since Mark Zuckerberg effectively controls Facebook through his voting block, he can accomplish whatever goal he sets his mind toward with the company.
The fallout is just like it was back in 1999. If Instagram can grow that quickly to 30 million users then some other company can figure out a way to grow that quickly as well and there will always be an excuse to pay up for growth until one cannot do so any longer. That is what happened in 1999. And that is what is happening again now. And just like in 1999 the numbers will assuredly trickle down as well. If Instagram is worth $1B for 30 million users, the next company with 5 million users will be worth at least $166 million...and so on. Eventually, you simply cannot justify the numbers, however.
News Corp. only shelled out $580 million to overpay for MySpace in 2005. Specific Media bought MySpace for $35 million 6 years later. I guess Rupert Murdock and his shareholders got their lession in overpayment for a bargain basement price!
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