iPhone (and now Android) photo app developer Instagram just announced that they sold for US$1 billion of Facebook stock and cash. They have no revenue model. The free app allows iPhone owners to take photos and use various filters to make them look archaic and so forth, and became the cool thing to do. The photos can be (and it seems are generally) uploaded to Instagram.
The three things I take away from this are
- This is a bubble investment. While arguably Facebook can monetise the vast Instagram user base by more tightly integrating the users into Facebook, the simple fact is they will spend $1 billion on a company with no revenue and just 12 staff. That’s great for the founders and investors, but doesn’t bode well for Facebook investors who will be buying into a company that spends money so freely.
- The value can disappear very quickly. While Instagram, until today, was cool, the ownership by Facebook, presence of, I’m guessing, thousands of other photo application and fickleness of the hipster-led market means that their user-base could disappear within months. It happened to MySpace after News Corp took over, and it will happen to Instagram under Facebook unless they are very clever. For my part – I no longer find Instagram style photos cool. That reflects the general passing of the faded photo fad, but this acquisition sounds the death knell.
- Easy money makes a nice story, but it’s not the path to real wealth. That path is, aside from a very few lucky stories, always the result of years of hard work building a genuine business that creates value for end users that they are willing to pay for. Please let’s not take the Instagram lesson as being that we can make $1 billion by building an iPhone app – we cannot.