When Facebook paid a cool 1 billion dollars for photo-sharing app Instagram recently, there was plenty of eye-rolling about such a young company using its overvalued stock to pay too much for an even younger player. By some measures it was a bargain. Instagram CEO Kevin Systrom initially demanded 2 billion dollars for his fledgling, 14-employee company, the Wall Street Journal reported this week.
Nevertheless, coming just days after social game maker Zynga paid 200 million for OMGPop, the maker of the hit game DrawSomething, the deal seemed to many to signify that the dreaded froth of the dot com bubble was once again fizzing to the surface. But to understand the reasons for these deals it can be just as helpful to put yourself in the flip flops of a typical American teenager as the loafers worn by a Silicon Valley executive.
Fifteen-year-old Mason Tate, the proud owner of an iPhone 4, often checks her Facebook page on her smartphone, but is even more enchanted with the tricked-out photos her friends send her on Instagram. One of the more than 30 million users of the app which launched less than two years ago, she says the photo-sharing app fits her mobile style far better than Facebook.
"It's fun, it's simple and it's quick," she says. "What more could we ask for?" That kind of sentiment is what probably persuaded Facebook founder and chief Mark Zuckerberg to reach deep into his investors' pockets for the company. Of course the purchase price represents just 1 percent of Facebook's predicted value at its imminent initial public stock offering, but it nevertheless underscores what could be the most significant shift in digital lifestyle since the internet went mainstream - the superseding of the trusty PC by mobile computers and the rise of the app economy.
Instagram commanded a billion-dollar price purely on the strength of its apps for Android and Apple's iOS devices, which according to analysts are much better than Facebook's own apps. Its website is just an afterthought that merely links users to the download sites for the app.
"People are living in the moment and they want to share in the moment," Professor Shyam Sundar of the Media Effects Research Lab told The New York Times. "Mobile gives you that immediacy and convenience." While Apple's iPad is often hailed as the harbinger of the post-PC world for the way it has cut into laptop sales, the more important shift is the number of smartphones that are used to access the web - and not just to read the latest news or status updates.
"I watch TV shows and movies the whole time on my phone," says Tate. "The screen may be small but that's why I prefer to watch videos than read something. According to Credit Suisse, smartphone sales will grow 46 per cent this year to 688 million units, far more than the 335 million PC's that experts expect to be shipped this year. By 2016 smartphone sales are predicted to reach 1.5 billion compared to just 350 million PCs.
If only a few of those smartphone buyers share the enthusiasm of today's early adopters, Instagram's billion-buck price tag may soon seem like a bargain, noted the Los Angeles Times in an editorial. "It's easy to see why . Zuckerberg would regard Instagram as a threat," it noted. "Spending 1 billion dollars to take out that competitor and absorb its superior technology makes a certain amount of sense for his company, which has an estimated market value 100 times as great."
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