Facebook's Instagram buyout spurs bubble fears

Last Updated: Wed, Apr 11, 2012 00:00 hrs

Social networking bellwether Facebook's billion-dollar-acquisition of photosharing app Insagram, seen largely as a defensive move to absorb a potential competitor or prevent it from falling into rival control, has sparked fears of a new Internet bubble.

A billion dollars for a less-than-two-year-old company that makes virtually no money and has just 13 employees is worryingly reminiscent of 2000's dot com bubble burst when a surge in Internet ventures and over-enthusiastic investors sparked a 2008-crisis-like collapse, say the critics.

The deal, which will see Kevin Systrom and Mike Krieger, the two Stanford University graduates who developed Instagram, make around $400m and $100m respectively, has doubled the value put on the company just a week ago, when it closed a $50 million funding round.

For a company that is expected to go through with its IPO to raise about $5 billion as soon as next month, Facebook's move could even hurt investor confidence in the social networking site founded by Mark Zuckerberg in a Harvard dorm room in 2004.

"The Instagram acquisition yesterday reaffirms my instincts about a very simple reason for shying away from a Facebook investment: there's too much churn in social media," said Forbes magazine writer J J Colao.

Even though Instagram may have alarmed Facebook management by reaching 35 million users within less than two years of operation, the originally iPhone-only photosharing app was hardly a Facebook killer, he said.

Some other technology writers however differ. Even though seemingly pricey, the Instagram deal actually pegs the company's per-user value at roughly $28, significantly below the median across major acquisitions in the last decade of about $92, said Andy Baio at Wired.

Both sides however do agree that Facebook's largest-ever acquisition does underscore the rising stakes in the social networking market in which established players need to constantly excite consumers with new offerings and features.

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