Is Instagram a $1bn accounting trick?

Facebook announced yesterday that it is to buy Instagram for $1bn in cash and shares, which I'm sure you already knew. Forgive yet another post on the subject, but I haven't read this theory anywhere yet as to why the purchase might make sense.

As The Telegraph points out, you could buy The New York Times for the same price as Instagram. I'm going to stick my neck out with the radical statement that in terms of likely future revenues, Instagram is not worth $1bn. You can disagree, but you'll have to come up with a convincing reason why Instagram is more valuable than the NYT. Good luck with that.

Still, Facebook bought it anyway, so it must be worth a lot to Facebook. The question is why? Why is a photo sharing app and a set of sepia toning filters - used by around 30m people - worth so much to Facebook?

I can only think of one reason and it has nothing to do with cracking China or defending Facebook's own photo galleries from an upstart competitor. Instagram wasn't really a threat and surely if it was,  rather than removing an obstacle, buying a two year old startup with fourteen employees for $1bn makes Facebook less of a good investment. If a marketer who learned to code in his spare time can threaten Facebook, surely Zuckerberg can expect to have to shell out $1bn on a fairly regular basis.

Facebook will shortly go public via an IPO with a valuation reported to be around $100bn and to justify this valuation, Facebook needs to demonstrate growth. It is not worth that kind of money based on today's revenues.

I can't help thinking the $1bn for Instagram could be an accounting 'trick' to help show that growth. I'm not an accountant and I'm very much speculating, but hear me out.

Facebook hasn't spent $1bn cash. There was some cash, but we don't know how much and the rest of the purchase was in Facebook shares. Let's assume the bulk of it was Facebook shares, so Zuckerberg's bank balance hasn't dropped dramatically.

Once the purchase is completed, Facebook will own a company 'worth' $1bn, which has shown phenomenal growth over the past year. Can it project that growth (now multiplying by $1bn) as a source of future value? I think that there's a good chance it can.

Apart from a big attention grabbing stunt to boost the IPO, it's the only reason I can think of that makes the purchase price less than insane. It would mean the more Facebook paid (in shares, not real money don't forget,) the better. The more Instagram's worth now, the bigger the value Facebook can put into its future value projections.

Facebook needs properties that show the sort of phenomenal growth rates, which Facebook demonstrated a few years ago. It also needs those properties to have a big current valuation. Instagram has the growth rate. It also now has the big on-paper valuation.

Seven reasons why Google+ is going to win

Last week, I said that it was far too early to judge whether Google+ is a Facebook killer. Here we are just a week later and I'm ready to stick my neck on the line. Google+ is going to win. By miles. Here's why.


Shiny, happy people
Google+ looks good. It's uncluttered and it has plenty of white space, like a good website should. I had a revelation after spending twenty minutes or so on Google+ last week and then quickly flicking over to Facebook. You know what doing that feels like? Like going back to your old Hotmail account from Gmail, that's what. How's Hotmail doing on the new users front recently?
That impression is with an ad-blocker on my browser too. Facebook's even more grim if you turn it off.

You can't square a circle
We all know that the big selling point of Google+ is circles. They work. After a week, I've already got colleagues, friends and random interesting people on Google+ and I'd never have done that with Facebook. With Facebook, you always have to choose between merging work colleagues, friends and family into one group and sharing everything with everybody, or keeping your network restricted. As a result, Facebook is 'only' most people's social network for friends and acquaintances. There's no choice to make with Google+; you just add everybody even vaguely interesting and throw them into a bucket that you won't share your stag party photos with.

I've read in a few places that Facebook's developers could just add circles, but I don't believe they can. Circles will only work if they're central to the whole platform - you can't bolt them on as an afterthought. If Facebook want seamless, easy to use circles, they're going to be in a constant battle with their legacy database structure. They also need a whole new friends maintenance front end. By the time they've fiddled with the current structure and failed once, Microsoft have got involved and wanted to tie Facebook circles to MSN, they've failed again and finally decided it needs a ground up re-engineering, it will be mid 2012 and far, far, far too late.

Yes, Facebook has sharing settings, but that's exactly my point. They're a bolt-on rather than baked into the core of what the platform does and so they're a pain in the neck to use.

The Germans say they're handy
Social networks work brilliantly on smartphones. You get notifications instantly and you can share instantly. We're only just getting started with the potential for instant photo and video sharing for example.

You might have noticed that Google is quite good at mobile. Even if Facebook build fantastic mobile apps (which they don't), Google will always be ahead, because they know what's coming up in the next version of Android. The next version Google+ app can incorporate new Android features before Facebook even knows they exist.

All that and the Google+ Android app is already better than Facebook's

A picture says a thousand words
Let's face it, Facebook's photo storage has always been pretty poor; low quality pictures and the galleries aren't great. Picasa is very good and tied into the heart of Google+. Photographers like things like Picasa keeping EXIF data from the photos rather than stripping it out. You can actually use Picasa as a proper photo storage tool rather than a toy that's just for sharing quickly.

Back to mobile, if you don't strip the EXIF data off, you can locate and map geotagged photos. Powerful? Oh yes.

Show me the money
Facebook really needs to start showing it can make money. Or rather profit. But every time it tries, there's an outcry about privacy, or obtrusive ads. Let's be honest, Google can run Google+ at a loss if they like and tailored search based on user profiles will make them money even if they never actually advertise directly on the platform.

Not being a slave to ads on the network is a hugely strong position. Google can make Google+ work for users. Facebook, first and foremost, needs to work for advertisers.

And back to mobile once more... There isn't much room for advertising on a mobile phone screen, so not needing to run ads is an even bigger advantage.

Lock 'em up and throw away the key
If it's so great, then what's to stop you migrating to Google+? Absolutely nothing. You don't need to take anything with you - not even your Facebook photos as they're low quality and were shared in a moment, not stored there as a long term solution. All Facebook has is knowledge of your network and judging by the speed that my contacts are finding each other on Google+, a lot of people have misjudged how valuable that is. Give people a cool animated circle and they'll rebuild their network in a few hours one evening, just because it's a fun thing to do.

Zuckerberg is terrified
Why else would Facebook be shutting down export routes for your data as fast as developers can set them up? That's not the sign of a company which believes it's got the strongest product and it's not the way to persuade people you're the best and most trustworthy guardian of their data.


The only thing I can see that would halt the Google+ bandwagon is an antitrust ruling, but if Google are going to be slapped down by competition regulators then it will take ages to happen in either of Europe or America, never mind both. The regulators have also got their eye on search dominance, not social, and by the time they get moving, Google+ will already have won.

Too big to fail?

Since I wrote this post on the Brilliant Media blog, I've heard one argument a lot, in various forms, in favour of Facebook being with us for good.

People seem to divide broadly into two camps...

1. People who think - even want - Facebook to disappear and are waiting for the crash (in case you hadn't guessed, I'm in this one)
   
   
2. People who think Facebook isn't going anywhere, because it's now 'too big to fail'
   
   

As an example of this second camp, the BBC's Rory Cellan-Jones gave us a quick mention on his blog (thanks! That will do wonders for the SEO) but dismissed the argument that Facebook was now vulnerable and could go the way of Myspace, saying

"I don't really buy that - Facebook is far more widely used and cemented into millions of people's social lives than MySpace ever was."

Essentially, Facebook won't fail like Myspace did, because it's bigger than Myspace ever was.

This is going to be pure opinion - no data this time, sorry about that - but I'd like to expand on why I don't buy this 'too big to fail' argument.

Firstly, I've seen no evidence to say at what size something becomes an inevitable part of our lives for at least the forseeable future, particularly on the web. At the time, everybody thought Myspace was pretty huge and Newscorp paid $580m for it, so at least somebody thought it was a good bet for the future. Facebook is bigger, of course, but the fundamental model of what it does is the same. It just does it with real names and a better user interface.

We think Facebook's huge, but it only really covers the private aspects of our lives. Work networks are what Linkedin is for. Imagine a platform that did everybody's working and private relationships (Google +? At this stage, who knows?). It's just an example, but that would be a far better commercial proposition and potentially be far bigger than Facebook. I'm not saying it will happen, just showing that there is a potential network out there that's bigger than Facebook, so the 'this one's too big' argument doesn't wash with me. We may not know what 'big' looks like yet...

By training, I'm an economist and so I'm interested in the motivations for why people and businesses do what they do. Rather than looking at something big and saying 'wow, that's huge, it will be here forever!', I'd rather talk about why people use it now and whether that might change. Economists talk about barriers to entry - how easy is it for a competitor to set up and to do what you do, only better?

So why do we use Facebook?

That's easy, it knows our network and who we like to connect with. Once you're connected, it can do messages, photos, chat, games... all the things we like to share.

So I use Facebook to share. I use Facebook to share because everybody else uses Facebook to share. And so do you.

The single barrier to entry for a competitor is that it's hard for somebody else to duplicate your network and that even if they built the world's most stunning social platform, it's no good unless your friends are on it too. Statement of the obvious, I know.

Other web tools have better lock-ins than that. Flickr has a massive storage of photos, that it would be a pain to move. For me, Blogger has this blog, which I'm unlikely to put in the effort to migrate (I still might though.) Facebook, almost by definition is very current. Its content is transient and I don't need to take any of the stuff it stores with me when I go, except for the network. Sure it stores lots of photos, but it's not very good at it and I only used it to share them quickly. They won't need uploading again or they 'd already be held somewhere better and just linked to from my Facebook page. Do you love Farmville that much? Or was it a diversion for a few weeks before you moved on.

Regardless of some people now actively wanting Facebook to fail - which I think is a dangerous sign for Zuckerberg - I don't think that network effect alone is strong enough to insulate Facebook.

Let's take Google+ for a minute. I'm absolutely not saying it 's the Facebook killer (see my last post) but it's a useful example. Google are taking a softly, softly approach to social this time and I think that's the right way to go. As a start up, you can't compete with Facebook all at once, but you can attack chinks in its armour through micro-networks.

Looking at a few personal examples, my sunday league football team tried to use Facebook to organise games and practice sessions, but gave up. It doesn't matter why it didn't work, but it didn't. We drifted back to email and I'd say Facebook's vulnerable for organising teams and events. Interestingly, Wave could potentially have done a cracking job, but never quite got going.

I paraglide whenever I can and love to share photos and videos with other pilots. Quality is important here and Facebook's just not up to the job. I'd also like to be able to build a looser network, who I wouldn't want as Facebook friends because they're acquintances at best, but I'd like to see their videos and read their tales of good flying days and they'd like to see mine (I hope.) Facebook can't do that. Google+ might be able to and it's definitely another chink in the armour.

My prediction is that Facebook will start to see it's base nibbled away at, by better organisation of micro-networks until somebody else builds a critical mass and then they'll see their traffic drop off a cliff over a couple of years. The Brilliant Media blog post was intended to show why I think we may just have reached the tipping point, where Facebook becomes vulnerable. Yes, Facebook could build those features, but their platform is starting to feel big and slow and complicated and there's no way they'll be contemplating a re-write from the ground up. It's the same problem of inertia that means Microsoft can't do phones and tablets.

By all means argue. I've been wrong before... But I'm interested in hearing why it wouldn't or couldn't happen, beyond 'Facebook's too big'. At least lets discuss what 'too big' means. Which parts of Facebook are now so big they're invulnerable?

A follow up on last week's Facebook decline story

I've written a post following up the Facebook decline story from last week, but you can't read it here...

Point your favourite browser at the new Brilliant Media blog. @Data_monkey will be putting in an appearance over there from time to time now too.

Don't worry, Wallpapering Fog isn't going anywhere. Drop back soon for more healthy scepticism and high quality back-of-a-fag-packet marketing analytics.

It's a good Facebook story. Run it and to hell with the data.

Pretty much all of the newspapers this morning are running a story on a possible decline in Facebook's UK user-base. It's fairly predictably been re-tweeted all over the place too.

The story actually came out yesterday and is - no-doubt - a cracking piece of PR for the services of Inside Facebook, who provided the stats.


Now, I've been predicting the decline of Facebook for a while and I'd quite like this story to be true. Our newspapers have done what they usually do with an interesting press release and just run the piece without checking any background to the numbers. "Inside Facebook say traffic is falling" runs the story. "We're not lying, we didn't say it was true, Inside Facebook did."

So where have these decline numbers come from?

From a subscription service called Inside Facebook Gold.

If you trawl Inside Facebook's site (and if you do better than me, then I'd love to hear in the comments) there's very, very little on the methodology that Inside Facebook Gold uses to measure active users. We've got a suggestion that it's tied to running ads on the Facebook platform and using Facebook's own tracking metrics and, er, that's it.

That coupled with the fact that so far, this decline in users is a 1-2 month blip and Inside Facebook admit they've seen bigger single month blips before, has my bullshit alert flashing amber. I'm not saying it isn't true, but how are we to know with no idea of where the numbers come from? It certainly doesn't merit blanket national press coverage.

It doesn't merit a multitude of retweets either, but they were at least as predictable as the copy-paste of a press release journalism.

As a quick example of why we need to know... I don't use the web interface to Facebook nearly as much as I used to, since I got an Android phone. The Android app doesn't deliver ads like the web interface does. For all I know, I've dropped off Inside Facebook's tracking even though my use of Facebook has undoubtedly increased since I got the phone.

That really could be one of many causes for a measured decline, depending on how the methodology works. UK Android handset sales have exploded.

Stats with no hint of the methodology, from a company you've never heard of before, that tell a story you were hoping to tell and that make a cracking PR fluff piece for the papers...

Bullshit Alert. Every time.

Too clever by half... how to over-complicate your marketing.

When I was working at EMI, a hot topic was the single pre-release window and whether it works. Sony and Universal have recently decided that it doesn't.

Pre-release involves letting radio stations have a single before it actually goes on sale. In marketing terms it sounds like madness - you play radio listeners your track for a fortnight, giving them time to get interested in it, record it, pirate it and potentially even get tired of it before you ever try to sell them a copy.

There is (or was) a logic to pre-release. Chart position is (was) an incredibly strong form of marketing that leads in turn to more radio airplay, so you build up as much interest as possible over the pre-release period and trigger it all in a single week. Then you cross your fingers for a number one hit and a snowball effect as that chart position leads to more and more airplay and an extended chart run.

My gratuitious bracket use is a hint to the problem with this strategy. Twenty years ago it was probably quite sensible - if a little too clever for its own good - but fast forward to 2011 and it's a disaster.

• Regardless of whether the label says a single is on sale or not, if the album's out then you can buy the track on iTunes. Do you really want the b-side that much? Come to that, what's a b-side in 2011?
  
  In 2011, you've just got a strategy that makes a mess of your marketing timing between iTunes and Radio.
  
  
• If you play people music they like and tell them they can't have it, what do you think they're going to do? Wait patiently for two weeks and then rush to HMV, or pirate it right now? No prizes for the right answer, it's too easy.
  

It's unbelievable that inertia in the music business has meant that it's taken this long to change strategy.

At least that one was probably a sensible strategy once. I was reminded of it this morning by the news that Heinz are going to pre-release a ketchup flavour on Facebook.

Why on earth would you do that?

Apparently they expect the 3000 bottle run to sell out in days and it probably will, but then what have you achieved?

Let's assume a best case. Facebook is a well targeted advertising channel for the housewives (that's media targeting housewives - they don't have to be women) who are typically responsible for ketchup shopping. Yeah, right, but moving swiftly on...

You generate loads of interest in the page and shift your 3000 bottles in less than 24 hours. We're obviously pretending here that most of the PR coverage isn't going to be the marketing industry taking to itself.

You've got 3000 happy Facebookers and lots more who couldn't try your tasty new condiment but really, really want to.

Now they've got a few weeks to forget all about ketchup before they visit Sainsbury's. Perfect.


As a strategy, it's over-complicated and inefficient. Pre-release music was an example of an industry obsessed with the music charts assuming that everybody else was still obsessed with them too.

Ketchup on Facebook sounds like an ad industry that is obsessed with Facebook assuming that everybody else is just as obsessed as them and will want to buy everything there.

Same game, same rules

Facebook's been tagged with a $60bn valuation says The Register.

That is frankly mental. Facebook may be sweeping all before it, but we've seen this before with AOL and MySpace; there's nothing to stop a user-base migrating very, very quickly to the Next Big Thing. I'm convinced that all it took to set Facebook on the path to riches is that it made building your network much easier than MySpace (that and it didn't look like a car crash in an html factory.) On the web, you're clever, then you grow, then you get big, then you get slow and then you die.



Facebook doesn't do anything other than connect you to people. Once you're connected, then what? Share pictures? There are better solutions. Share video? Again, there are much better providers. Send email, when there's gmail instead? Please. Chuck sheep at your friends? Well ok, but $60bn for an airborne sheep assault is still madness.

This is the same old boom and crash game we've seen before. There's no way city analysts believe that Facebook is worth $60bn either but the game is reverse pass the parcel - keep playing and watch the market rise, but try to make sure you're not holding any shares when the music stops. It will keep happening, in web bubbles just like housing, until we change the rules.

I can't help feeling, like a few other commentators, that this valuation is less a sign of Facebook in rude health and more a pointer towards its employees thinking of cashing out. A precursor to decline.

The next big thing cat

A fantastic summary of internet hype from somebody over at b3ta.com.

(Not always the most respectable site in the world - if you browse around and are offended, don't say you weren't warned.)

I'm not sure if I've just come across the Next Big Thing, but this site sort of reminds me of Facebook when I first came across it. Mainly because their friend search says that nobody I know uses it. Facebook started like that when I first scanned my email address book, so I deleted my account and then suddenly the 'join me on Facebook!' emails started arriving.

No current users as evidence of future success. Try selling that one to your bank manager.

I really like the idea of FriendFeed though, because it's not trying to be a host for everything. Let's be honest, Facebook is rubbish at photos and video - Flickr and Vimeo are much better, so what you need is a tool to tell everyone you know when you create anything you'd like to share, wherever it happens to be. This is what opensocial was supposed to do and it's interesting that some ex-Google staff are behind FriendFeed.

Whether FriendFeed is really the Next Big Thing or not, I think its model is the future for the social web. Facebook will eventually die because it's not good at anything except linking you to other people and it's not brilliant at that. What we really need is an engine like the Facebook friends list, that lets you share from anywhere. And it could be FriendFeed.

I don't get it. Maybe I'm not web 2.0 enough?

Skittles has launched a kind of aggregator site for its brand.

If you visit www.skittles.com, you're greeted with an ever-present hovering menu thing that leads to feeds from Twitter, Facebook, YouTube, Wikipedia, Flickr... all the usual web 2.0 favourites.

I don't get it. For several reasons.

The site sits behind an age verification check, because its content is uncontrollable. Surely most Skittles buyers are young? We'll let that one go though, because any interested ten year old will just lie on the check.

The menu isn't well executed and it gets in the way. It even obscures part of the 'Contact Us' page, which belongs to Skittles. That's just lazy.

The major problem with it seems to be that in a web full of aggregator sites, why would anybody be interested in this Skittles effort? Maybe there's an army of Skittles fans, incapable of using Flickr to satisfy their craving for Skittley pictures, who will form the user base.

There's one very good reason why people will be interested. In the best traditions of the web, the Skittles Twitter feed is now carrying messages like 'Skittles made me piss a rainbow. Is that normal?'. Sorry, but that was one of the cleaner ones. I don't think I want to know what Skittlefisting is.


The site is generating loads of chatter, but it's not exactly positive and I've got serious doubts about whether it will be allowed to stay up for long enough to look for any increase in sales.
Thankfully, the pictures and videos links point to corporate spaces on Flickr and Youtube, otherwise I think we can all imagine what could have been achieved with some creative image tagging.

If skittles.com does stay up, then as soon as the people abusing the Twitter feed get bored and move on, it's going to have no traffic at all.