A lot of money gets thrown around in the speculative world of internet start-ups. But Facebook's $1 billion purchase of Instagram, a stripped-down photo-sharing app, is raising eyebrows as an especially costly, and (to some) inexplicable, acquisition. Instagram is a free app that brings in no revenue, and the company was most recently valued at $500 million by a group of investors. Instagram has 13 talented employees, but even Warren Buffett might blush at the $77 million that Facebook ponied up for each of them. Did Facebook overpay?
Yes. Facebook is feeding a new tech bubble: It's "hard to imagine how a service that just lets you take a photo of your breakfast, color it blue, and share it could possibly be worth anything," says Charles Arthur at Britain's The Guardian. Facebook, which was "born on the desktop," undoubtedly realized that "smartphones are the future of computing," and figured the acquisition would secure a place for it in "the social future that's developing around us." But it paid way too much, offering $33 for each of Instagram's 30 million users — all of whom are already on Facebook. "That's bubble thinking."
"Instagram and Facebook: The next tech bubble?"
And this doesn't bode well for Facebook's future: Facebook doesn't seem to realize that "having money to burn" is entirely different from "actually burning the money," says John C. Dvorak at PCMag. Every acquisition requires a "make-or-buy decision," and Facebook wrongly chose to buy instead of coming up with a similar product. You can sense an "emerging paranoia at Facebook stemming from fear of competition," which "bodes ill for the long-term survival of the company." This could just be the first step on Facebook's "path to oblivion."
"Why Facebook is a long-term loser"
Hold on. Instagram might be worth it: "The history of Silicon Valley suggests that expensive purchases" like Facebook's "may not always be so crazy," say Somini Sengupta and Nick Bilton at The New York Times. When Google bought YouTube in 2006 for $1.65 billion, you heard similar howls about how the video-sharing site had "no revenue and little prospect of profit." Now, YouTube dominates video-sharing, and has become a "significant online advertising platform for Google." Facebook may find the same success with Instagram.
"Facebook plays offense and defense in a single deal"
THE WEEK'S AUDIOPHILE PODCASTS: LISTEN SMARTER
- Why you should stop believing in evolution
- How Israel's hawks intimidated and silenced the last remnants of the anti-war left
- This 1,600-year-old Viking war game is still awesome
- 4 things NASA can teach you about a good night's sleep
- The fascinating political evolution of Paul Ryan
- 10 things you need to know today: August 21, 2014
- The secret to handling pressure like astronauts, Navy SEALs, and samurai
- It's time for the police to rethink 'shoot-to-kill'
- Is the Christian music industry liberalizing on gay marriage?
- What you need to know before you support the police in Ferguson
Subscribe to the Week