Facebook must beware a return to the dot.com bubble days

Allister Heath
WHILE the City was enjoying its Easter Monday off, Wall Street was out in force. The most astonishing deal signed yesterday was Facebook’s $1bn purchase of Instagram. This was the social network’s biggest purchase to date and comes as a prelude to Facebook’s flotation – but the real story was that Instagram is just 551 days old and employs no more than 13 employees.

The firm had just 100,000 users on 13 October 2010, 200,000 a week later, 300,000 eight days after that and reached 1m by 21 December that year. Six weeks later, it had doubled again, and then again three months and a bit later. It had 27m at last count, which means that Facebook is paying about $37 each. Nice work if you can get it for Instagram’s founders and investors, and they have produced a great piece of software that allows mobile users to share photographs – but as we learnt during the global credit bonanza of the noughties, if it feels and sounds like a crazed bubble, it almost certainly is one.

It may just be that Facebook – run by the 27-year old Mark Zuckerberg – is clever enough to make its acquisition pay – after all, Instagram’s users upload 5m pictures every day and its new Android app has been phenomenally successful, with 1m downloads in just 24 hours. But others should beware: the last time people paid fortunes for users and eyeballs, rather than for cash flows, it all ended in tears. And even Facebook could stumble: its corporate culture and the rules it imposes on its users may not mesh well with Instagram’s approach. There have been lots of disastrous takeovers in the tech world in recent years, where companies pay huge amounts for an asset which subsequently loses much of its value.

There are plenty of good internet firms out there today, unlike in 1999-2001, but that is no excuse to pay silly prices for trendy properties – and yes, that means even you, Mark Zuckerberg.

We all know that there has been massive deleveraging in the UK, right? Wrong. As Citigroup’s excellent Michael Saunders calculates, including net public debt (which officially rose to 64 per cent of GDP at the end of last year), the total debt/GDP ratio for the UK (excluding financial firms) was 270 per cent at end-2011, similar to the level of a year earlier (271 per cent) and little changed from the peak (278 per cent of GDP in the third quarter of 2009). It remains far above levels of 10 years ago (191 per cent in late 2001) or 15 years ago (169 per cent of GDP in late 1996).

The situation in the private sector is better but not sufficiently so. The private debt/GDP ratio (excluding financial firms) fell to 206 per cent at end-2011 from 231 per cent in late 2008. But this remains far higher than 10 years ago (160 per cent) or 15 years ago (127 per cent). Taking just households, the ratio fell from 111 per cent at peak in the first quarter of 2009 to 101 per cent late last year — but this was just 69 per cent 15 years earlier. We won’t need to go all the way back down – but greater deleveraging will be required. For non-financial firms, debt as share of GDP is down from 121 per cent in the fourth quarter of 2008 to 105 per cent – but that remains far higher than the 82 per cent seen a decade ago or the 58 per cent seen 15 years ago – even before pension fund deficits, which ensured that overall corporate liabilities actually rose last year. The UK can probably bear more debt than 15 years ago – but not this much.

One thing is sure: we will all have to tighten our belts for many more years to come.

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