Instagram: Overpriced or a smart move by Facebook?
Raymond Snoddy wonders whether the Facebook/Instagram deal is a symbol of how money and power has shifted in the internet world…
It didn’t exactly make big headlines this week – maybe because we have come to assume that there is nothing extraordinary in a mobile app, less than two years old and unburdened with profit, selling for $1 billion.
Yet even by internet standards Facebook’s acquisition of Instagram, an app that allows mobile users to share photos, is dramatic.
Conventional wisdom suggests that while the deal is overpriced, at the same time it is being seen as a smart move by Facebook founder Mark Zuckerberg.
In corporate terms it is probably a defensive play. Photo-sharing is at the heart of Facebook’s business and here was an upstart photo-sharing app, which has been downloaded by more than 30 million people including President Obama. The company couldn’t risk ceding photo dominance in the mobile sphere to anyone else. Who knows where Instagram might have led to if left to its own devices.
The deal is, however, perhaps more important as a symbol of how money and power has shifted in the internet world.
Facebook, which is expected to launch its shares on the market next month giving the company a value of $100 billion, is now powerful enough to buy any rival that emerges from the dormitories of Stanford University.
It becomes a self-fulfilling prophesy particularly as Facebook is far from being a profitless internet phenomenon, making $1 billion last year on revenues of $3.71 billion, more than 80% of it coming from advertising.
Last year Facebook advertising revenue rose by no less than 69%, although Facebook Payments are rising as a proportion of the whole.
Earlier this month there was another big symbolic internet moment in the UK when, according to the Internet Advertising Bureau and PwC UK, online advertising spending rose by 14% to £4.8 billion. This made online the single largest advertising medium in the UK, overtaking newspapers for the first time having already left television and radio in its wake.
The UK is the first major market in the world where such a thing has happened. There may be some quibbles about definition and the extent to which online TV and newspaper ads are included in the total but none whatever about the direction of travel.
On a like-for-like basis online increased its take by 14.4% in 2011 and similar double-digit growth figures are expected over the next couple of years.
Against the background of a near-recession economy the scale of the rise is formidable when television and radio have been flat and newspaper advertising down 8%.
There can be no doubt that advertisers are continuing to shift larger proportions of their budgets online. Enders Analysis forecast that online advertising in the UK will grow by 14% this year and 12% next.
While search continues to account for the biggest share – £2.7 billion last year (a figure that has risen from £20 million in 2001) – interest in social media advertising is growing. Consumer goods companies are paying a lot more attention to developing direct relationships with consumers using social media.
This should ensure further growth for Facebook and Twitter, which is at present ramping up its advertising presence in the UK. According to the IAB, spending on social media in the UK was up 75% year-on-year to £240 million.
Social media advertising in the UK is dominated by Facebook, which according to Enders took £180 million in the UK last year. That’s unlikely to be the end of the story and mobile is also showing strong growth.
Enders, for instance, believes that by 2015 mobile will account for 30% of internet usage and that mobile search and display could account for 20% of online advertising spending. But there are a few small chinks in the apparently unstoppable rise of the social media, matters such as privacy and the rise of the trolls something that could harm Twitter.
At the same time the traditional media is still generally seen as stronger at brand building and that difference could endure even though online video advertising is also showing signs of growth.
Privacy and the dangers of hacking accounts remains a problem for Facebook. Andrew Neil likes to tell how his Facebook account was hacked last year and he was involuntarily signed up as a friend of Colonel Gadaffi. The social network company does have a strong security team and says it does everything it can to prevent such abuses.
The position of Twitter is rather more difficult. As a social media network, which has sprung to fame primarily as an instant news source, it rightly treasures freedom of expression. Its rise has also been boosted by the presence of celebrities and their millions of followers, even if their tweets are largely used for self-promotion.
There is little doubt that Twitter is suffering reputational damage because many of those celebrities are being targeted by the trolls – usually anonymous people subjecting them to vile abuse. Former footballer John Hartson and Little Britain star Matt Lucas are among those staying clear of Twitter until something is done about the practice.
The law can clearly make an impact. The troll who sent a threatening message to Tory MP Louise Mensch ordering her to choose which of her children would die has been taken before the courts and will be sentenced soon.
In the UK Twitter has hired a former journalist to advise celebrities how to cope with such abuse but may have to take a more interventionist role in future such as closing accounts that persist in going beyond the normal realms of free speech. Unless there are specific threats and the law has been broken the answer may be to simply ignore the trolls as beneath contempt.
But such blemishes apart it would be a foolish person who tried to predict where the rise of online and social media advertising will peak. You can be sure though that when Twitter floats it will not be valued at anything like $100 billion.