Was Facebook's purchase of Instagram worth it?
By: LN on Apr 22, 2012 08:16:47 PM

The problem with assessing whether or not this is a bubble is that this information economy is still in its infancy. Having this conversation now would be like trying to envision the way Gutenberg's printing press would revolutionize the world, and doing it only 20 years after it's invention. This single invention fueled revolutions of science, religion and education, but his first venture led to him being sued and left with an enormous debt. The invention revolutionized the world long before a viable business model emerged to support the mass production of books for commercial gain. This should not be seen as a critique of the technology, but an acknowledgement that the business model for success was not fully realized.


    Similarly, anyone who saw one of Henry Ford's model T's roll past them would have instantly known that this invention was going to completely change life as they knew it, but making money from the invention is entirely different. The car has persisted over the last century, but hundreds of companies have gone bust trying to make a few bucks from this technology.


    While cars rely on a network of roads, and a supply of fuel; the internet relys on a network of wires, or increasingly wireless, and the fuel is the bits being created by the users (consumers/producers). In 1904 the United States could produce the gasoline needed to power this new invention, but since then we have become dependent on others, both friends and foes. Certainly no one thinks that the car industry represents a large bubble in today's economy, but imagine if suddenly Israel attacks Iran, or the thus far stable House of Saud was to crumble like the various dictatorships around it. Imagine what this would do to gas prices, and therefore the car industry. By conventional terms this does not represent an overvaluation, and is therefore not a bubble, but is nontheless a very real possibility that could easily undermine the future of a number of currently viable companies.


    As it stands, Facebook, Google, Apple, Yahoo etc. depend on networks (roads) to efficiently transport the bits (oil) being produced by their users. Currently these tech companies are not responsible for assisting in maintaining or improving the networks that they rely upon, but I believe that it is a reasonable assumption that they will assume some of those costs in the future, and if not, the ability for their users to access their services will diminish as the cost of data becomes prohibitive for those of modest means. Secondly, current valuations assume that the Net will exist largely as it does now, with little changes to things like the physical structure or user privacy. I believe that this is a faulty assumption, given the recent activity in congress, and increasing grumblings from consumers over how their data is being used.

Something as simple as a Do Not Track ammendment, tacked on to some meaningless transportation bill, or an increasing use of encryption by users, could have significant effects on a companies ability to monetize their user base. Lastly, majority of the worlds internet users are currently in relatively wealthy countries who's governments are largely democratic, but the rest of the world does not mirror these demographics. Future growth will come from poorer, more autocratic countries. I doubt the Egyptian, and Tunisian citizens who have bravely risked their lives to free themselves from an overbearing dictatorship will be eager to reveal everything they say and do going forward. Freely embracing a service that allows you to communicate to overthrow a dictator should not be confused with an acceptance of data mining ad infinitum in exchange for a discounted guided tour of the pyramids. These internet users will be even less likely to embrace being exploited by Western companies, and will value privacy and anonymity more than those in Western countries.


While I do not believe that we have created a bubble in the classic sense, this information economy is more fragile than most believe. I believe the Arab spring, SOPA, Occupy Wall Street etc. are only the birth pains of this new digital economy. Facebook may be worth 100bn today, but past performance is no guarentee of future success; just ask Netscape, AOL, and Yahoo.

 

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Michael Mordechai YadegariReviewsout of 83 reviews