Facebook announced this week that they are purchasing Instagram, a mobile photo-sharing app, for $1 billion in cash and stock—an amount so mind-bogglingly huge it left many industry experts shaking their heads. Instagram has zero revenue, so what is it about the app that’s so appealing to Facebook? Its extreme popularity, plus the fact that it has become a social network in its own right, in the same way Facebook started out.
Some speculate that the acquisition reflects a new tech bubble—a billion dollars for a 13-person startup seems laughable. However, over a billion photos have already been uploaded to Instagram, with over five million more going up daily, so access to Instagram’s enormous user base comprises a lot of what Facebook is paying for.
Whether the acquisition turns out to be a win or loss for Facebook, it wasn’t the first outrageous social media buy, and it won’t be the last. Here are a few others:
News Corp and MySpace
Rupert Murdoch’s News Corporation purchased the once-booming MySpace in 2005 for an incredible $580 million. It seemed like a good idea at the time—MySpace was the fastest growing social network with up to 70 million unique visitors per month in its heyday. Unfortunately for News Corp, shiny new Facebook came along, and MySpace became a ghost town within 2 years, ultimately dragging News Corp’s revenues down with it. In June 2011, News Corp unloaded MySpace onto Specific Media for a paltry $35 million. Though MySpace now focuses more on music and video and still attracts 35 million visitors per month in the U.S., it’s considered more or less dead in the water.
Google and YouTube
Search engine boss, Google, bought video-sharing site YouTube in 2006 for $1.65 billion, which was its largest ever acquisition at the time. The surprising part of the deal was not only that the purchase took place even in the midst of copyright infringement lawsuits by three separate media companies—the same kinds of suits that ultimately killed Napster—but that YouTube had yet to turn a profit. Google gambled on the fact that the public would turn increasingly toward the Internet for video-based entertainment—a gamble that has proven to be worth taking.
AOL and Bebo
The one-time ISP behemoth, America Online (now just “AOL” and significantly less behemoth-y), purchased British social networking site Bebo for $850 million in 2008 but, like MySpace, Facebook came along and squashed it like a bug. It only took two years for AOL to cut its losses and unload the company. In June of 2010, AOL was able to sell Bebo to Criterion Capital Partners for an undisclosed amount, though estimates are less than $10 million. According to the BBC, AOL’s purchase of Bebo was “one of the worst deals ever made in the dotcom era.” Apparently, AOL’s board agreed—the CEO at the time of the acquisition, Randy Falco, was fired.
Microsoft and Skype
In May of 2011, Microsoft announced it would purchase VoIP company, Skype, for $8.56 billion in cash, which, for context, is an amount higher than the GDP of many countries around the world. Experts questioned the buy, despite Skype’s $860 million revenue at the time, citing the company’s large long-term debt and the fact that it had been previously purchased by eBay, who subsequently unloaded most of their shares on a private investment company at a $1.2 billion loss. Not only does much of Microsoft’s technology overlap with Skype’s, but Skype has only about a third the users of Microsoft. It remains to be seen whether keeping Skype out of the clutches of Google and Facebook is ultimately worth the price Microsoft paid.
Zynga and OMGPOP
If you’ve discovered the addictive new game you can play with friends or strangers, “Draw Something,” then you’ve probably heard of the company who made it, OMGPOP. Just a couple of weeks ago, game company Zynga (maker of “Words With Friends,” among others) announced they were buying OMGPOP for $200 million. That’s a lot of money for a single blockbuster game, but Zynga is betting that OMGPOP can come up with more games that are so good they cost the U.S. economy billions in lost productivity. For the sake of Zynga and smartphone entertainment alike, let’s hope OMGPOP isn’t just a one-hit wonder.
