Issue of the week: The $1 billion app

Only in Silicon Valley can a 551-day-old company “with no revenues and barely any staff” cost $1 billion, said Charles Arthur in The Guardian (U.K.). That’s what Facebook paid this week for Instagram, the popular photo-sharing app that lets users take pictures on their phones, retouch them with stylized filters, and post them to social networks. In only a year and a half, Instagram has attracted more than 30 million devoted users, who collectively upload 5 million photos a day. No question, that is impressive. But when the once great Kodak is basically bankrupt, how can an app that does no more than let you take photos and share them “be worth anything at all”—much less a 10-figure sum?

Because Facebook knows the future is all about mobile, said Rafe Needleman in CNET.com. Next year, smartphones are expected to overtake PCs as the most popular devices for accessing the Web, and Facebook risks being left behind. Instagram is mobile-only, and its simple, elegant app is miles better than Facebook’s photo offerings. So by buying the “best-of-breed,” Facebook not only instantly improves its capabilities in the mobile space, it “takes out a future competitor.” It also keeps a potent threat out of the clutches of rivals like Google, said Dan Lyons in TheDailyBeast.com. When people start to realize “just how huge the mobile Internet wave is going to be,” $1 billion is going to look cheap.

I detect a whiff of panic here, said Dan Primack in Fortune.com. Just last week, Instagram secured $50 million in venture capital funding, pegging its value at $500 million. At the same time, 5 million people downloaded Instagram’s new Android version in a week. Facebook was clearly spooked into paying twice what the company is worth. Such paranoia “is not healthy” for a supposedly $100 billion company, said John C. Dvorak in PCMag.com. Couldn’t Facebook have created a similar app on its own for less than $1 billion? “Having money to burn is one thing. Actually burning the money is another.”

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That’s what they said when Google bought YouTube in 2006, said Somini Sengupta and Nick Bilton in The New York Times. If companies like Facebook seem a little anxious, it’s because they are “aware of their mortality.” They know how little it costs to create the next hot Internet giant, and how fast the landscape changes. This is Silicon Valley’s guiding logic at work: “Eat the new start-up before it eats you.”