Facebook’s decision last week to pay $1 billion for Instagram, a company with a single product, no revenue and 13 employees, raised more than a few eyebrows in the world outside the dot.com and high-tech communities. The deal suggested to some that there is more money than sense floating around Silicon Valley. Those more familiar with the still esoteric world of social technology and mobile apps weren’t so quick to accept that judgment. Many of those familiar with that world say that the investment in the startup likely will be a sound one.
That opinion is driven by recognition that Instagram’s single product already is a game-changer. It is a free app that allows people to manipulate photos and share them with Instagram websites and other users. It has a wide following, too. More than 30 million people use it, a majority of them in the younger demographic that is accustomed, even addicted, to taking and sharing photos on their smartphones. That’s a market hard to ignore, especially for companies, like Facebook, eager to increase revenue.
It’s especially hard to ignore because the Instagram app allows users to work almost exclusively on mobile devises, bypassing computer-based applications. Companies like Facebook, for the moment at least, still are heavily dependent on the computers and are anxious to quickly move to the more fast-paced mobile world. It’s $1-billion purchase of Instagram is a step in that direction.
The question, of course, is whether the purchase of a startup with no revenue but a popular following will pay off. Precedent says it could. Though Silicon Valley is littered with the carcasses of once high-flying companies, there are enough success stories to suggest that a $1-billion purchase is more an investment than a gamble.
A decade ago, eBay, already a successful online auction site, drew criticism for spending $1.5 billion to buy PayPal, a relatively unknown online payments company. Ten years later, PayPal, provides a huge chunk of revenue to the eBay company. That’s not the only success story. In 2006, Google paid $1.65 billion for YouTube, the video uploading site that at the time had earned no revenue. Today, YouTube delivers significant revenue to Google.