Facebook’s Instagram takeover highlights its insecurity
The social network acted like an elephant scared of a mouse when it bought the photo-sharing app for $ 1bn
Facebook’s acquisition of Instagram – for $ 1bn – tells a lot about Mark Zuckerberg’s state of mind. Which is at least as interesting as other business considerations and was best captured by cartoonist Ingram Pinn in last week’s Financial Times comic. To illustrate John Gapper’s excellent “Facebook is scared of the internet” column, Ingram Pinn draws an agitated Mark Zuckerberg frantically walking through a hatchery, collecting just hatched startup chicks as fast as he can, while, in the background, AOL and Yahoo collect older chickens in larger carts.
In last week’s Monday Note, I hinted that I’d never put my savings in Facebook’s stock. (For that matter, I see writing on business and owning stocks as incompatible). When I read the news of the Instagram acquisition, I wondered: imagine Facebook already trading on the Nasdaq; how would the market react? Would analysts and pundits send the stock upward, praising Zuckerberg’s swiftness at securing FB’s position? Or, to the contrary, would someone loudly complain: What? Did Facebook just burn the entire 2011 free cashflow to buy an app with no revenue in sight, and manned by a dozen geeks? Is this a red-flag symptom of Zuckerberg’s mental state?
Four things come to mind.
1. Because he retains 57% of Facebook voting rights, Zuckerberg rules its board and can make any decision in a blink of an eye, no debate allowed. This can be a great asset in Silicon Valley’s high-speed tempo, or it can stir up shoot-from-the-hip impulsiveness.
2. Facebook’s founder attitude reminds one of Bill Gates in Microsoft’s heyday: no crack allowed in the wall of its dominance. The smallest threat must be eliminated at any cost. Where Microsoft used legally dubious tactics, Facebook unsheaths its wallet and whips out $ 1bn. In the startup world, this will have two side effects. One, Facebook is likely to become the exit of choice Google once was. Two, the size of the Instagram transaction (some of it in stock) is likely to act as a beacon for any startup harvesting users by the millions. It sets an inflationary precedent.
3. By opting for such a deal, Facebook’s management reveals its own feelings of insecurity. It might sounds crazy for a company approaching the billion users mark and providing an array of services that became a substitute to the internet’s basic functions. But, with this transaction, the ultra-dominant social network acted like an elephant scared of a mouse. Instagram has 35 million users? Fine. But how many are using the service more than occasionally? Half? How many are likely to switch overnight to a better app? Most likely many will. Especially since Instagram is not a community per se, but a gateway to larger ones such as Twitter and Facebook.
4. From a feature-set perspective, Facebook might find itself in a quandary. Kevin Systrom and Mike Krieger designed the ultimate stripped-down application: a bunch of filters and a few basic sharing features. That’s it. It is both Instagram’s strength and main weakness. Such simplicity is easy to replicate. At the same time, if Facebook-Instagram wants to raise the feature-set bar, it might lose some of its user base and find itself competing with much better photo-sharing applications already populating Apple or Android app stores.
To put it differently, Facebook photo-sharing model had been leaking for a while. Zuckerberg just put a serious plug on it, but other holes will appear. A couple of questions in passing. Will Facebook continue to accept and encourage loads of third-party photo-sharing apps that connect to its network? Some are excellent – starting with Apple’s iPhoto, especially the iDevice version that will always benefit of an optimised hardware/software integration. How does Facebook plan to deal with that? And if it chooses to grant some level of exclusivity to the Instagram app, how will the audience react (especially when you read comments saying “We liked IG because it wasn’t FB”)?
Lastly, the bubble question. Again, three things.
First, let’s be fair. If indeed there is a new internet bubble, Facebook isn’t the only player to fuel it; investors who lined up at Instagram’s doorstep did it too. A few days before the deal, IG raised $ 50m at $ 500m valuation; Zuckerberg snatched the company by simply doubling the bet.
Two, comparing the FB/IG deal to Google’s in 2006 acquisition of YouTube for $ 1.65bn doesn’t fly either. From the outset, everyone knew internet video was destined to be huge; it was a medium of choice to carry advertising. Therefore, the takeover by Google’s fantastic ad-machine was likely to yield great results. YouTube became a natural extension of Google services – just look at how competing services such as DailyMotion in France or Vimeo are doing without the ad rocket-engine.
Three, the metrics used in an attempt to relativise the deal are dubious at best. Instagram had no monetisation strategy – other that a lottery-like exit. This says applying any kind of cost per user ($ 33 for the theory in vogue) is bogus. Being unable to project any sustainable revenue mechanism makes such a valuation process completely pointless. In Instagram’s case, the only way to come up with a price tag was guessing the amount of money a small group of suitors – Facebook, Google and Twitter – might be willing to cough up for Instagram’s eyeballs.
If this deal shows one thing, it is the frenzied, cut-throat competition these three players are now locked in. Mark Zuckerberg is not through with collecting hatching eggs. He won’t be alone either.
- Tech Weekly: highlights from CES
- Instagram: what is Facebook getting for $1bn?
- Google Apps highlights – 12/16/2011
- Can Instagram solve Facebook’s mobile problem? – Fortune
- Tablet takeover unlikely – Columbia Daily Tribune
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