As Facebook announces its $1bn purchase of Instagram, is it really worth the money?

Steve Dinneen

What could be a bigger sign of a bubble than paying $1bn for a company with no revenue model? At all. It’s not even really a company – it’s an app that makes your photos look like Polaroid snaps (Polaroid being a company that has twice filed for bankruptcy). Bonkers, right? But this is missing the point. The crux of Facebook’s operation is allowing people to share their photographs online. This is what keeps people coming back – the rest is just dressing. And people coming back is what pays Facebook’s bills. The simple fact is that Instagram is better than Facebook for sharing photographs on your phone – and smartphones have become the social media battleground. Facebook, which funded most of the takeover with stock, has strengthened its grip on the mobile market and taken out a rival in one fell swoop. $1bn is cheap.

Steven Dinneen is deputy lifestyle editor of City A.M.

Richard Holway

Clearly both Facebook and Instagram are great companies with great products and a very devoted following. This is beyond dispute. The question is whether one is worth $1bn and the other is worth $100bn. I have reservations. As someone who has lived through the first internet boom it is almost impossible to drown out the words “bubble, bubble, bubble”. Can Instagram possibly be worth $1bn? I just don’t see how that valuation can possibly be justified. The people who will be the winners out of this are the shareholders who are in there already. You have to look at comparable tech industry valuations. Sooner or later all companies – even Apple – get within an industry average price to earnings ratio in the range 10-20. On that basis, any new investors are going to have to wait a long time to realise any decent returns.

Richard Holway is chairman of TechMarketView.

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