YouTube is a content paradise though. There's tons of value there and you can sell ads against it or even charge for premium services.
Where's the money in Instagram? The content is practically worthless and their only real value is in their userbase. Even though I use the Instagram client, most of the time I see photos, they come through Twitter. So that also reinforces for me that any value is in the users and not the actual content, which is mostly crap.
I'm more convinced that we're in a 2nd bubble now more than ever.
Lots of people were saying that YouTube could be monetized, especially by Google, because Google needed content, which YouTube had, Google wanted to get into the booming video landscape and Google had massive bandwidth, which YouTube desperately needed. The only issue was how fast Google would clean up all of the copyright infringement and how it would affect YouTube.
That's exactly what this was. That's why he bought them a day after they closed a $50 million investment Zuckerberg freaked out about Instagram's plans to become much bigger, especially now that they just launched on Android, too.
But back to the original proposition, is this indicative of a bubble when you drop 1 Billion, or >1% of your estimated market cap on a preventive/defensive measure?
There are a few ways to look at this. The 1% is in cash and shares and we don't know the proportion or I haven't seen that anywhere so far.
Now to put the question in context if you have a small company that is worth, say $500,000, then 1% is $5000 you might spend that much (in cash alone yearly) as "insurance", say for property/casualty or liability. And you would pay that no matter what the business climate if you perceived a risk to your business, right?
But it could indicate a bubble simply because if the market is up people are more likely to overpay for anything because they feel very upbeat and enthusiastic about the future.
So paying a large number (and 1 billion is a large number and not trivial no matter how you slice it) would be more likely to happen in a bubble.
But there are to many variables in this that are not know to draw a definitive conclusion.
That said my feeling is we are in a period of irrational exuberance.
I daresay that's true, but not exactly relevant. I've also played blackjack, roulette, rock/paper/scissors, and I'm not sure if logic and tactics that work in games are always valid business plans...
This is an excellent and important point, maybe the most insightful I've read in this thread.
Whatever value Instagram has for Facebook, it probably has at least double that value for Google, who could buy it just as easily. By paying a premium and showing major interest first, Facebook preempted an opportunity for Google to get some traction in the social space. Very smart move.
If you have billions to (over)spend, what does it say when you are terrified of tiny competitors who have shown no ability to compete with you, no revenue model and no long term ability to monetize in place?
For a fraction[1] of that they could have cloned the software pixel-by-pixel and weaved it in with facebook in a way that the original instagram couldn't.
I have trouble believing instagram was about to turn into an 1 billion dollar threat.
Social sites like Facebook are mostly about photo sharing. This acquisition is all about controlling the main reason people use a social site like FB (or one that competes for it).
> I'm more convinced that we're in a 2nd bubble now more than ever.
I agree. So far I've mostly dismissed talk of "the next bubble", but this pretty much solidifies it.
Of course no one knows when the bubble will burst, so I guess investors are making as much money as they can before it inevitably does burst. It's a classic case of the "greater fool theory" http://en.wikipedia.org/wiki/Greater_fool_theory
If this acquisition goes bad, Facebook goes from being worth 100 billion dollars to being worth 99 billion dollars. People don't lose their savings or retirement accounts.
To me this just confirms that people who talk about bubbles now weren't here for the last real tech bubble.
What I was referring to with the greater fool theory is that the investors who put in ~$50 million, for a valuation of ~$500 million thought they'd find a greater fool to sell the company to, to make money off of (since I don't think Instagram could actually earn that money from its userbase), and that greater fool turned out to be Facebook.
In turn, Facebook, implicitly assumes that the greater fool from whom they will make money from this deal is the public who will buy shares when Facebook goes IPO. Because with $1 billion in profits for 2011, if the market values them at $100 billion, that will be a P/E ratio of 100. Even if they double their profit in 2012, their P/E ratio will still be 50, which is astronomical.
When people put huge money into things that have low value from a business fundamentals point of view, just because they think they can sell later on to someone else to make a huge profit, I think that's the very definition of a bubble.
What you call greater fool is just who has more value for Instagram. Instragram is worth more to Facebook than it is to Sequoia because Sequoia don't run a social network with hundreds of millions of users and aren't trying to stop Google from killing their business.
If I buy a bathtub from a bathtub warehouse at a 50% markup am I the 'greater fool' or do I just like hot baths?
> Because with $1 billion in profits for 2011, if the market values them at $100 billion, that will be a P/E ratio of 100. Even if they double their profit in 2012, their P/E ratio will still be 50, which is astronomical.
And then if it doubles again it becomes 25, and then it becomes 12, and then it becomes 6. only 4 years away to Facebook being a blue chip stock - so all that the 100 PE ratio is telling you is that they do believe that revenue and income will grow pretty quickly over the next few years.
The last bubble got messy because public markets were being used as what private equity does today. The public was shouldering the risk profile of a big VC firm that filled in all the shitty deals.
"And then if it doubles again it becomes 25, and then it becomes 12, and then it becomes 6. only 4 years away to Facebook being a blue chip stock - so all that the 100 PE ratio is telling you is that they do believe that revenue and income will grow pretty quickly over the next few years."
Those are some BIG ifs. I'm going to contrast Google and Facebook to explain why I think Facebook is overvalued.
When Google was in it's fast growth phase, it could perhaps justify a P/E like what Facebook has now - because of the way in which Google makes money. For roughly 1 out of every 14 Google searches, a user clicks a Google ad. As the amount of people on the internet grows, that means the amount of searches grow, meaning the number of ad clicks grows in tandem. Even today, with all the smartphones and tablets and people from the BRICS coming online, Google only has a P/E of 21[1].
Now contrast that with the way in which Facebook makes money. Targeted ads. The revenue they generate doesn't grow in tandem with Facebook's userbase. Granted, the revenue goes up as companies chase the eyeballs, but it seems to be a mixed bag of results selling ads on Facebook, so some companies aren't going to get the results they want and will quit Facebook. People there don't go there primarily to look at products (completely different to many Google searches). And of course some companies will get great results, but the overall point is that there isn't a direct correlation between user growth and revenue growth.
Ah!, you say, but there are other ways for Facebook to make money (off the top of my head):
a) Premium celebrity pages (pay Facebook for a prominent page to get fans)
b) Somehow charge for user accounts, maybe for premium features
c) Selling user data to third parties
d) Zynga etc. profit sharing
e) Others
Maybe they could make some revenue from premium celebrity pages, but not enough to justify a 3-figure P/E, IMO. Charging for premium features would be highly controversial, if they did this it would be a sign of desperation and a complete departure from where they began. They probably will do some form of c at some stage (don't worry, your data is completely anonymised!) but users would probably abandon ship to competitors in droves if they did. They will continue to make money from social gaming, but it's fickle and short-lived, plus Zynga is trying to wean themselves off Facebook to grow their own revenue.
Overall I think they will continue to make billions from ad impressions and social gaming profit sharing, but nowhere near enough to justify a $100bn valuation IMHO. If they bow to Wall Street pressure and really try to squeeze their userbase data for every dime (you could call this 'doing a MySpace', i.e. shooting themselves in the foot), people will leave in droves to the next social hotspot. So it will be 'interesting' to see how they will justify the lofty valuation over the coming years.
FaceBook is only worth 100b on paper. It's not worth close to that. The reason this is absolutely a bubble is because you have one paper tiger buying another paper tiger with virtual paper.
This is no different than the real estate cycle in L.A. or South Florida a few years ago, when people would buy and sell condos based on market potential multiple times before the condo was even finished. It all works until someone down the line tries to cash in. It will work for FaceBook and Goldman Sachs, but a whole lot of consumer investors are going to get AOL'd in the long run.
real estate was highly leveraged borrowing that took national household debt and repayment figures to new records. Facebook stock is being bought by institutions and funds, and those numbers still don't come close to 98/99 records despite online revenue being an order of magnitude larger today than what it was then
And it helps to ignite bubble mania for the Facebook IPO. I wonder how much the added hype will boost the issue price -- it could help to discount the $1 billion FB paid.
Facebook currently has very limited editing for their pictures. By acquiring a well-known and talented company, Facebook can roll this into their current offerings. I would be very skeptical that this was a user-driven move. I can't imagine a large percentage of Instagram users who are not also Facebook users, even if people posted a lot of Instagrams to Twitter.
its not about new users. it is about engaging their existing users on a new platform - mobile. Pretty sure instagram mobile crushes facebook mobile in engagement
one, instagram has brilliant team which also include creative people and not only tech.
two, very high yet active user base.
three, which is purely on business value - the cumulative time spent in the mobile app of 30 million active instagram users, when you add up, will give more revenue in facebook ad in the following years. i would say, facebook played safe here in trying to regain the usage time.
Where's the money in Instagram? The content is practically worthless and their only real value is in their userbase. Even though I use the Instagram client, most of the time I see photos, they come through Twitter. So that also reinforces for me that any value is in the users and not the actual content, which is mostly crap.
I'm more convinced that we're in a 2nd bubble now more than ever.