Facebook's $1 billion acquisition of Instagram, a photo sharing app that costs zero dollars to use and has no source of revenue, sure feels like a social networking tech bubble. At least under this definition of economic bubbles from a July New York Times column about LinkedIn's possible over-valuation. "There’s widespread agreement that bubbles occur when a speculative mania causes the price of an asset to soar far above its intrinsic worth," wrote The Times' James B. Stewart. "After the mania runs its course, and investors finally recognize the divergence, the bubble typically bursts, causing prices to plunge." Some of that parallels what's going on with Instagram and Facebook. $1 billion is "far above" Instagram's "intrinsic worth." But, then again, what does "intrinsic value" mean for a social networking company anyway?
For social media companies in general, "value" comes from advertising or getting people to buy things. Zynga, for example, makes money selling its games, and access to certain parts of those games. Facebook advertises to its hundreds of millions of members. Some have questioned the real "value" of these business models. But at least there's an attempt at making money. Instagram has none of that. In fact, it has no business model, really, at all.This is when all the tech bubble speak starts to sound reminiscent of the dot-com era, during which companies were wildly overvalued both on the stock market and among other companies, which overpaid for now-defunct companies like GeoCities, which Yahoo bought for $3.57 billion in 1999.
For Facebook, Instagram's value, however, is in its popularity. The company has grown from 5 to 30 million users in the last 10 months and just last week opened itself up to Android users, attracting 1 million new users in just 12 hours. Instead of going through with its own Instagram-esque photo-filter plans, as Bits Blog's Nick Bilton had reported last summer, Facebook, which already has integration with the photo sharing app, has bought the competition. And, while Instagram hadn't monetized all those glowing photos of food and cocktails and puppies, Facebook already has ways (advertising) to make money off the millions of photos posted to the site every.
One acquisition, however, does not a tech bubble make, but, this Instagram purchase follows a string of similarly astonishing valuations. Beyond Facebook, which as the mother of social networking, possibly deserves its $5 billion IPO, Groupon, Zynga and LinkedIn all had whammy valuations, which haven't met those expectations on the market. Plus, let's not forget that the not yet public Twitter, another popular useful service has yet to prove much worth. And then there's all those other social networking companies -- ahem, Path -- doing a lot of the same thing, also attracting a lot of attention and big valuations -- ahem, Color -- which is the other part of a bubble equation.
But, perhaps the very fact that we're talking about this bubble means that there's no bubble at all. "A key characteristic of a bubble is that no one thinks it's a bubble. If everybody's upset, it's a good sign," said Netscape founder Marc Andreessen last summer when there were murmuring of a bubble. Or, maybe we're cautious about bubble bursts these days, since that last one -- that housing crisis thing -- still has millions of people soaked.
This article is from the archive of our partner The Wire.