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Instagram's Billion Dollar Bubble

Steven Blum
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If Instagram is worth $1 billion, what does that mean for your start-up? Quite a lot, actually. Never before has the mobile world seemed like such a ripe market for emerging start-ups as today. Even the New York Times is talking about how cash flow and innovation is moving from the PC to the mobile app world. And it's not just Instagram that is raking in the dough, of course. The app Draw Something was bought by Zynga just a few weeks ago for  a whopping $200 million. 

But if making money off your app were so easy, we would all have retired months ago. There were some factors about Instagram that made it particularly alluring to Facebook:

  • Facebook's whole raison d'etre is photo sharing and the company couldn't afford having a rival social networking site which focused on photo sharing as well.
  • Instagram is insanely easy to use, almost as if it were built-in to the phone itself.
  • It was growing at an absurd rate of over a million users a day after the release of Instagram for Android.

Obviously, you can't manufacture that kind of success. But Instagram happened to be at the right place at the right time; it also benefitted from sheer luck. And that $1 billion pricetag? I consider it to be a bubble, and that bubble must burst.

For one, Instagram isn't making that much money. Neither is Draw Something, mind you, although at least they have ads and a paid version of their app. But the fact is that these companies don't have real business plans. They're worth a lot of money because of their potential to make money down the line. And a bubble built around this kind of wild speculation can't last for long.

Now I really hope I'm wrong, because I think Silicon Valley has a lot of amazing ideas and super talented developers. But the fact that an APP was just bought for close to a BILLION without any clear business strategy signals that things are getting out-of-hand. 

Unless, of course, Mark Zuckerberg knows something I don't. Which is possible, but doubtful. Likely, he just wanted to swallow up a potential rival before that rival beat him to the punch. That strategy is flawed; and when Instagram is replaced by a new app with even better filters, I wonder if Facebook will buy that app, too. I wonder how long this whole charade can keep up.

(Photo: I Heart My Art Tumblr)

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Comments

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  • PatPion Apr 12, 2012 Link

    You have taken the words directly out of my mouth!

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  • Garaen Flake Apr 12, 2012 Link

    Well why wouldn't Facebook invest in a company with no grounded biz plan? The company itself flourished purely on its potential. In the beginning there was also no income making product. Pure dumb luck made its founder a multi billionaire. It's all speculation. The same speculation that is ruining world economies, impoverishing millions and generating unabashed fortunes for a small few. Makes me wonder about the things that matter. A strategic move for a billionaire upstart is more important and noteworthy than investment in technology that actually does something useful. I don't have an example because, well perhaps none are so noteworthy. Wait what about the new machine being tested by Coca-cola that creates drinking water. Now on that one can invest.

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  • Steven Blum Apr 12, 2012 Link

    I agree...it IS all based on speculation, even (or especially) Facebook's valuation. At least Google, though, has a business model based on advertising and real cash flow. Facebook is monetizing their site now through targeted advertising, but who knows how much they're making (I, for one, never click as I find the recommendations often quite absurd). But how is Instagram monetizable in the same way? Will Facebook analyze what's in your Instagram picture and then sell you ads based on that information? I have no idea, but I highly doubt they'll be making anywhere near 1 billion from this app anytime soon.

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