By Therese Poletti, MarketWatch
SAN FRANCISCO (MarketWatch) — The once-adolescent Facebook Inc. is now showing its age, even before next month's widely anticipated debut on Wall Street that is expected to value it at $100 billion.
The exorbitant $1 billion price tag the social network agreed to pay on Monday for Instagram, an 18-month-old photo-sharing service, highlights how Facebook is no longer the pacesetter it once was. For Facebook to spend so much for a startup right before its mega initial public offering shows that it is no longer the hot new thing. It's also feasible it had some competition courting Instagram.
Read about Facebook's Instagram deal.
"This is the pre-IPO period, and normally companies don't take dramatic actions like this unless there is an opportunity at hand that they can't ignore," said Ray Valdes, a Gartner Inc. analyst.
Users react to Facebook's $1 Instagram deal
While some congratulated the Instagram team, many gave the news a thumbs down, Emily Steel reports on digits.
Paul Kedrosky, a senior fellow at the Kauffman Foundation, a foundation devoted to entrepreneurship, agreed. The deal is "unprecedented in terms of cash-flow usage in the pre-IPO period," he said. "It suggests to me an urgency that has to do with a nascent bidding war." Kedrosky said the most likely candidate had to be Google.
Such a drastic move by Facebook
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also signals it will be on the lookout for acquisitions in areas where its own offerings are not as popular with its 845 million monthly active users. Mobile services are likely to be a continued big push.
"They don't have a hot mobile app," said Sandeep Dahiya, associate professor of finance at Georgetown University's McDonough School of Business "That is the biggest justification for this acquisition." A huge number of consumers have found Instagram more fun for sharing and editing photos, which they often then also post on Facebook.
Facebook said that as of December, it had 425 million monthly active users who used Facebook mobile products.
Facebook, however, tried to characterize this giant deal as a one-off, and said it won't be making any more big deals, according to co-founder and Chief Executive Mark Zuckerberg.
"This is an important milestone for Facebook because it's the first time we've ever acquired a product and company with so many users," Zuckerberg wrote on Monday on his Facebook Timeline. ""We don't plan on doing many more of these, if any at all."
Read Zuckerberg's post.
Not that anyone believes him.
"Zuckerberg says no in his letter. I think he is wrong, and probably knows it," said Kedrosky. "What Instagram showed is the precariousness of Facebook's position because Facebook is admitting that someone in 550 days gets to a size and scope that they represented a potential threat."
Is Facebook's Instagram buy sign of bubble?
Facebook is acquiring Instagram for $1 billion in cash and stock in what is the social network's biggest acquisition to date, Dennis Berman reports on Mean Street. Photo: Getty Images.
Stunningly, in its short life so far, Instagram has garnered over 30 million Apple Inc.
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iPhone users, who use the service to share photos taken with their iPhones and make them look even better. Since Instagram became available to Google Inc.
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Android users, last week, over 5 million have downloaded the application on Android devices. Just last Friday, the San Francisco company with about a dozen employees closed another round of venture capital funding that had valued Instagram at $500 million.
Still, $1 billion in cash and stock is a lot for a company that hasn't made any money yet. Cries of tech bubble resounded on Twitter and elsewhere.
Perhaps it was the fast popularity of the service on Android phones that showed Instagram has legs beyond the iPhone. But the speculation also makes sense that Facebook would only have done such an acquisition while in the throes of readying its IPO if a serious cash-rich competitor like Google was also sniffing around, or had even made an offer.
A spokesman for Facebook said the company would not comment and a spokeswoman for Google declined to comment on speculation.
The next Silicon Valley parlor game is trying to figure out what other startups are also on Zuckerberg's radar.
"They will be doing a lot more of these," said Dahiya of Georgetown. "I think the mobile space is their big challenge. [Facebook] is a very real estate hungry app. It's a challenge of how to get all that functionality onto that screen of a mobile phone."
Tumblr, the blogging software popular with the under-25 set, is being mentioned by a few pundits as another possible fit.
Some are also throwing around the idea that Pinterest, the community image-sharing site, is another option Facebook might be considering. Pinterest had 18.7 million unique monthly visitors in March, while Tumblr had 21.8 million, according to comScore Inc.
On Pinterest, users create scrapbooks with images according to their interests, and "pin" items to their pinboards that can be repinned by others. Two-year old Pinterest is also growing quickly, but it is also not really a popular mobile app and would not, at least for now, answer that need.
Read column "Could Pinterest become the next Napster?"
"The obvious folks are Pinterest, Path, even a Twitter which is the great white whale of social networks out there," said Kedrosky of potential targets for Facebook. "All these guys who go from being ho-hum to 25 to 30 million users, then they suddenly become another platform that is a threat."
As fast as social media companies can be built up, they can also quickly lose their luster. Remember what happened to MySpace?
At least Zuckerberg & Co. are mindful of what can happen to companies when their leaders take their eyes off the competition, and they appear to be doing everything they can to avoid a similar fate. As growing pains persist, more deals will likely play a role in the company's future. No matter what Zuck says on his Facebook page.
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US
: Nasdaq
Volume: 24.88M
April 11, 2012 4:00p
Market Cap
$585.94 billion
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US
: Nasdaq
Volume: 2.20M
April 11, 2012 4:00p
Market Cap
$203.82 billion
Therese Poletti is a senior columnist for MarketWatch in San Francisco.
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