Two months after Facebook announced the acquisition of the mobile photo editing and sharing app Instagram for $1B in cash, the social media giant has become the favorite subject of scrutiny in the financial media. The 10-figure purchase was made in anticipation of an IPO on the NASDAQ; part of a feverish run up to a landmark valuation that elevated Facebook above long-standing power brands like McDonalds and the New York Times as it went public. After a disastrous first two weeks that has seen the company’s shares fall 30% in value, investors and market regulators are looking for answers.
Why anyone believed that buying stock in a company that is fundamentally not interested in generating revenue is a relative mystery. Combine that problem with the company’s ongoing lawsuits with Yahoo! over patents, its FTC privacy issues, drastically increased competition in the marketplace, and the still relative youth of social media as a viable business proposition, and several more questions arise.
In advance of the IPO, the immense valuation of Facebook was well known by the public to have been based solely on potential, rather than tangible assets – its nearly one billion users worldwide would constitute the single largest captive audience for any message on the planet. However, the inability of Facebook to convert this opportunity into revenue is equating to a disaster on Wall Street and in the company’s new Menlo Park, CA headquarters, severely testing the breaking point of the social bubble.
The winner of this whole debacle is Instagram. Following the blueprint of what social can really achieve, the makers of the app grew a userbase of 30 million people with an innovative product and ultimately sailed away from the treacherous waters with a billion dollars in cash. Facebook, meanwhile, is drowning.
In reality, Facebook is worth more than just money. More accurately, Facebook’s value transcends what any amount of marketing or advertising money can buy; the network is deeply entangled in the everyday lives of a majority of Americans, serving as a primary vehicle for their social interactions. Even if the company’s stock continues to fall through the floor, general users will be largely unaffected, carrying on their status updates, photo sharing, and social gaming. Perhaps the example that is being made of social media as a poor investment will change the game for businesses and ultimately return the website to those who make it valuable: the users.