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BLOG: Instagram: Bubble, Bubble, High Tech Trouble?

John P. Mello Jr. | April 16, 2012
Facebook's purchase last week of Instagram, maker of a mobile photo-sharing app, for a staggering $1 billion dropped a lot of jaws everywhere, particularly among high tech pundits.

Facebook's purchase last week of Instagram, maker of a mobile photo-sharing app, for a staggering $1 billion dropped a lot of jaws everywhere, particularly among high tech pundits.

News of the deal sent a number of commentators to the ramparts waving red flags of danger, yellow flags of caution, or green flags of business as usual -- depending on the flag-waver's analysis of the arrangement.

Not only is the deal a sign of a high tech bubble, Bill Snyder writes in InfoWorld, but it's a sign that the big players in the industry are losing their innovative edge.

"If these events don't indicate the rise of a dangerous tech bubble, nothing does," he opines.

"The tech economy shows signs of moving away from the notion that real value is created by innovation," Snyder adds. "The Instagram deal is much like Google's $12.5 billion takeover of Motorola Mobility for its patent portfolio, a sign that big tech companies are more interested in playing financial and legal games than staying productive."

However, Andy Baio makes a persuasive case at Wired Online against the bubblistas. He conducted an informal analysis of some of the biggest high tech deals in the last ten years and concludes that the $28 a user Facebook was paying for Instagram's 35 million adherents was among the lowest in that data set.

He concedes, however, that the cost per employee of the deal -- $77 million -- is "off the charts." The median cost per employee of the deals analyzed by Baio was $3 million.

Rather than that number being a sign of a bubble, however, he argued that it's more a sign of the scalability of modern app architectures.

"Instagram's numbers are exactly what you'd want to see in a social network--high user counts with the lowest number of employees," he added. (PCWorld's Jared Newman compares Facebook's shopping trip to some other famous purchases.

Facebook and Instagram may be a symptom of a high tech bubble, but they're not the source of it; Ben Bernanke is, argues James Saft in a Reuters article.

"Twice since 1997 the Federal Reserve has eased policy in the wake of disruptions to financial markets and twice speculative bubbles have grown up in the aftermath," he writes. "It is looking increasingly as if social media technology shares are the third in the series."

Chris Dixon, co-founder of Hunch, a recommendation website recently scooped up by eBay for $80 million, casts doubt on the warnings of bubble alarmists.

"How many 'bubble' articles appeared after Google's acquisition of YouTube?" he asks in a tweet. "Turns out it was one the best acquisitions of the decade."

 

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