Last week Facebook purchased Instagram for $1bn, valuing the photography sharing app at a cool $1bn. Instagram is less than two years old, has just 13 full time employees and yet has now leap frogged the value of the New York Times, which has been around for 114 years longer.
There are many scratching their heads at the news, not least because they had never heard of Instagram before. In fact, just five per cent of Facebook users actually use Instagram, which has only really taken off among young people who want to give their photos a vintage look. Its 30 million users is certainly impressive for a start up company, but it’s difficult to see how the $1bn valuation can be justified.
It wasn’t a surprise therefore, that industry analysts were throwing around the phrase ‘bubble waiting to burst’ and expressing concern that the usually savvy Mark Zuckerberg may have made a bad call on this one. Indeed, the world of social media is notoriously fickle and the online economy can still be as difficult to predict as when the first dotcom bubble burst in 2000. Just ask Rupert Murdoch, who bought Myspace for $580m before selling it for a humble $35m after its users abandoned it in droves for a new outfit known as Facebook.
Rupert Murdoch learnt some expensive lessons, which Mark Zuckerberg will not want to repeat in a hurry. Social media is an incredible fast evolving industry, which took Myspace by surprise because they got too comfortable and too complacent with what they had already achieved while Facebook came along and offered its users new and more exciting ways of communicating.
Instagram’s rapid growth is based on the fact that it is better at sharing pictures than many other devices and networks including Facebook. It’s this that would have worried Mark Zuckerberg as he saw five per cent of his users going elsewhere for image sharing, an important part of Facebook’s appeal. Facebook itself is valued at $100bn and so spending one per cent of its value to nip this rival in the bud and keep Facebook on top is definitely an astute move.
Instagram, which has no revenue at all, is clearly not worth $1bn on its own, but by outperforming the digital giants in just one area of their business, it has wormed its way in with the big boys. Now that the industry giants have established themselves, we may not see another site such as Facebook emerge from nowhere, but the tactic for the next generation of Mark Zuckerbergs will be to provide a new or better service for sharing content and then wait for the highest bidder to snap it up.