A glass of water can be worth more than the New York Times if Zuckerberg is lost in the desert and you happen to have water. It can be worth even more if Larry Page is dying of thirst at the same time and starts a bidding war.
perfect example of use value vs. exchange value. Instagram has an exchange value of $1B (in FB stock and cash) simply because Facebook chooses to make that exachange . . .poof . . just like that. Instagram also has a use value, which is yet to be determined (and is impossible until there's a price they charge for their service to folks that USE their product). Of course they could put ads on their service in which case the use value then is determined by the advertisers that PAY to use Instagrams 'network'.
One other slightly different view I'll throw out there is that FB having to pay Instagram $1billion, is simply its "cost of doing business".
For FB to maintain its leadership position -- especially with an IPO around the corner no less -- it needs to periodically "eat up" any new threats that may come along. This is afterall the tech space where "low-cost barriers to entry" are common, making this industry very different from what you read in business school.
So, if I was a (future) shareholder of FB I would simply need to be wary of these periodical "write-offs". Afterall, isn't this really what happened to Yahoo? It had to keep spending money to stay relevant until their common shareholders got disillusioned?
Hmm, I'm not even sure that the "lost in the desert" part is inappropriate as the metaphor. What was it that I read about an AirBnB for dogs the other day?
But see, the second somebody talked about that the people without pets said "derp, pets.com 2.0" and the people with pets all said, "take my money now!". So, it's really one of those apparently bad ideas that's secretly good, whereas many startups are the opposite: apparently good ideas that are secretly terrible.
I don't care if you're selling whale shit online, if a whole lot of customers line up the second you mention your idea, you're in business whether third parties like it or not.
As funny as it may sound, extended travel is a serious PITA when you have pets at home. Being able to leave your dog or cat with someone who has built a reputation as a good caretaker would be hugely preferable to taking them to a kennel.
It sounded so dumb at first, but after thinking about how my pet changes my travel schedule and has caused me to ask too many favors from friends. Someone please do this.
It'd be awesome to be able to leave my pet with other fellow pet owners. I'd be willing to take pets in my house as well to keep my cat company.
> A glass of water can be worth more than the New York Times if Zuckerberg is lost in the desert
True. But only if you have the only water on sale in the desert.
What is instagram anyway? It tints photos and uploads them? That would cost Zuckerberg or Page maybe $10k to code and roll out a clone. I don't get it. Unless they're paying the owner of a rival tap to turn it off. But then someone else will just open a new tap, the barrier to entry is low. I still don't get it.
This explanation makes me daydream about a new social app that convinces FOO million Facebook users to join just on the promise that each user gets a stake in the payout when it gets bought. How impossible is it to get 30 million people on board for an average payout of $30 each? Maybe some game mechanics could help... get more of your friends to join "Let's-eat-FB's-lunch-agram" and you get a larger payout.
No I do not think that is all, and some could argue that they have 30 million iOS users...but people need to realize, Facebook could have done this for 100,000$, 10,000 times less then what they paid for.
And they have the world's largest and most captive audience, 845 million people, they would have just needed to convince less then 4% of them to have a similar amount of users.
Make no mistake, this is a crazy amount of money spent on a less then 2 year old, 13-man company. I think post-IPO, Mark might not have been able to get this as easily approved by the board of directors.
It's really not realistic to say that facebook could make it for $100k; even entry level developers at facebook make more than $100k salary yearly which means they each cost the company significantly more than that including benefits, office space, hardware, etc. Even if they took 2 developers, half a PM and half a UX person on this for only one quarter it would cost way more than that.
Of the 13 people, two are founders, two are engineers, two are developers, the rest are customer service reps.
Of the four engineer/developers, only one of them wasn't hired in the last few months. One of them was hired two weeks ago, one in January, another in December.
So only one developer is responsible for the app and all the servers, the others haven't hardly had time to get up to speed.
Not surprising, the iOS version is trivial since CoreImage' image processing library provides all the filters and image processing. Doing the port to Android was the hard part, although most likely they just licensed an image processing library from someone, or extracted it from GIMP's open code.
I think it is realistic to say the cost of developing the iOS version, which is what most of their 30 million customers are using, was well under $100,000.
First of all you are talking about Instagram and I am talking about facebook. If some random students made Instagram who were otherwise making minimum wage it's not like you can claim Facebook should be able to make it for <$1000. Also, it isn't just the app that we are talking about but the server and all associated infrastructure.
But secondly, I'm not sure how you went from 13 people to 3, lets assume we we accept that we are only talking about the 3 people. Even if those 3 people are making only $50k yearly salary, working on this for 6 months is already costing Instagram well over $100k once you take into account office space, benefits and hardware.
They could have done the tech for that much. The marketing would have cost a bit more. But do you know how much it costs to send tech and marketing a year and a half in to the past? That requires BIG bucks.
Yeah but they'd have to either integrate it with the Facebook app, which is over complicated and absolutely stinks on Android (still), or they'd have to release a separate app which would be competing with Instagram's brand.
The success of these new things like Instagram and Tumblr seem to be their mindless simplicity.
What brand value? I never hear anyone talking about Instagram in real life, ok, maybe in some twitter feeds. But they'll go move on to the next big thing if the next big thing gave them more of what they wanted. Instagram is probably a bigger brand name to hackers, and developers than it is to regular users.
I'm not sure if this reflects poorly on me, but I actually forgot what Instagram specifically did, and had to do a quick search to refresh my memory upon reading the news.
Mentally, I lump Instagram, Pinterest and other en-vogue social-ly apps together. Speaking of the latter, I would imagine they're probably rubbing their hands with glee right about now.
You're thinking in the wrong terms. Is the Instagram brand worth less than 1% of Facebook? Also, I see hordes of high school and college females- especially the 'popular' ones with iphones- using instagram. When you have possibly the best target market, and a tiny valuation for what basically is facebook's other lifeblood (photos are second only to the social graph), Instagram was positively cheap.
I'm sorry, I think we're living on different planets.
Edit: I don't mean to rubbish what you're saying. I agree that it and the brand have value but to me that equates to something like $150 to maybe $250 million at a push. $1 billion is off the wall.
Unfortunately, if the price somebody was willing to pay is the only concept of valuation we have, the stock market would never crash. The problem is that there is a concept of overvaluation. Otherwise we wouldn't have bubbles. When future expected earnings don't match up with the stock's sky-high valuation reality tends to catch up eventually.
Instagram does not produce more value for more people than the New York Times, our newspaper of record. It is an app that nearly everyone reading Hacker News could write in less than a month, and scale just as easily. Facebook could have added photo filters to its photo sharing site in less than a week and suck up a good portion of Instagram's audience. I'm still at a loss to explain why this was a good idea - but I guess we'll see if it bites Facebook in the ass.
This purchase, and the fact that people having a tiny idea are given multi-million dollar seed rounds regularly, are why I think we're in another bubble.
> A glass of water can be worth more than the New York Times if Zuckerberg is lost in the desert and you happen to have water.
What if you don't bother to drink the water? What do you call that?
Call me naive (I am), but there has to be more to this than the respective to ones needs narrative. Here's a few points that I've soaked in:
- Instagram will continue to be a separate entity
- Instagram "brand" is worth $
- Instagram revenue is worth ?
OK. So, let's say FB acquired Instagram for their "brand". How will FB benefit from Instagram's brand if they are a completely separate entity? If they are after revenue/audience, where's the money? There is more to this than just being best buds with one of the photo sharing platforms of choice.
If Zuck owns Instagram he doesn't have to worry that it will hurt Facebook in some large way. Instead he can hope owning Instagram will help Facebook in some large way. That's worth a billion to him.
correct. Instagram is "worth" $1 Billion to Facebook, but it's worth $100 to a funeral home. But if you think about it, Instagram is worth way more than $1 billion to Google.
Don't be too sure. I'm sure there's some innovative funeral home that would be able to utilize Instagram to offer a way for mourners to document the mourning process and find closure, a way that would be worth much more than $100. Maybe not $1 billion, but more than $100 for sure. ;)
Because of the huge user base! (Of course, 95% of instagram users are already on facebook, but imagine if instagram uploaded your photos by default to G+)
If it didn't have the potential to become a very profitable, large scale business, I doubt if Mark Zuckerberg or Larry Page would have much reason to care about it.
This sort of "appeal to authority" holds very little weight in and of itself.
Rich and smart people make plenty of mistakes, and are just as prone to tunnel vision as the rest of us.
However, I am fairly certain they view this acquisition as protective rather than expansionary. Picking up Instagram just means it can't be used against them (FB), not that it has some hidden-to-the-masses potential for being monetized.
I wasn't suggesting that it was valuable because Mark Zuckerberg cared about it. Quite the opposite actually. I was suggesting that Mark Zuckerberg cared about it because it was valuable.
If it had no potential to be a sustainable business, how could it be a threat to anybody?
Great analogy. They are at the right place (with viral growth and momentum) at the right time (sitting between two at war competitors). I hope this doesn't set a bad example though. It's not like every company with viral growth is going to be acquired for such expensive valuations.
For those who are not paying attention: kirubakaran is telling you that Google bid up instagram and Zuck blinked.
Now, the funny thing about this is that I can understand Larry Page thinking that he is dying of thirst from lack of penetration into the social media world. But Zuck? The smart thing would have been to let Google have it. It's 14 guys. And an app. Puhleeaz.
What this tells you is that Zuck doesn't really know what's going on and that Google can exploit this. Google has a lot more cash than Facebook, and if Google keeps playing this game, Facebook is going to be distracted as hell. And broke before too long.
Part of the problem is that Facebook is facing an employee revolt. They've been clamoring for their IPO exit for a looooong time, and they've had to put up with Zuck and his crew.
Part of the problem is that Facebook is pissing users off, especially with this new timeline nonsense. People want nothing to do with Facebook, but all of their contacts are on Facebook, and its the perfect medium for building a personal brand and connecting with friends.
Facebook is the Yahoo of social media. But it's 1999, the bubble is growing like crazy (it will pop soon) and nobody, absolutely nobody, has heard of the little company that was founded last year that will eventually come to dominate the social media world.
This whole thing has really thrown into contrast the extent to which people conflate monetary value, societal value and the abstract concept of 'merit'.
A business is valuable to own if you think it may bring you more money in the future, or you think that owning it will give you an advantage over your competitors.
That's it. That's the entire thing. Nobody is trying to put a value on the relative social impact of Instagram vs the New York Times. Facebook merely calculated that they'll make more money as its owner than they would otherwise.
That our culture has seen to directly associate cash value with 'intrinsic' value is another issue entirely.
A business is valuable to own if you think it may bring you more money in the future, or you think that owning it will give you an advantage over your competitors. That's it. That's the entire thing.
I don't think that's accurate; that assumes that 100% of businessmen make 100% of decisions purely to make more money, which I don't think is true. If you have a big pile of money, one of the things you can do with it is buy or start companies that you think will make you more money, but other things you can do include buying/starting companies you think will advance your personal goals, buying companies you'd just like to own, etc.
For example, we have a lot more wealthy tech people owning space-travel companies than I think would be justified based on the economics alone. They consider them valuable to own because they want to own a space-travel company. Similarly, there is some non-zero value, beyond its projected revenues, to owning the New York Times. I would certainly pay a non-zero amount for the social power it would gain me to own the NYT, so there you have an existence proof that the value of its social position is at least a few thousand dollars. :)
> A business is valuable to own if you think it may bring you more value in the future […]
The mistake is conflating money and value: money can be a value, but other things, like riding into space, the prestige of owning a paper, and general quality of life are also values. A decision makes economic sense if the value you gain from it exceeds the value you give up to get it, regardless of the form those values take.
This has been shown to be true for sports teams. People buy them for more money than the underlying business is worth because they want to be the next Mark Cuban, George Steinbrenner, etc.
You make a good point - there really is no way to fully disconnect the human element in these decisions.
I do think there's a real difference between Jeff Bezos/etc founding a space-travel company and Facebook buying Instagram, however. Although Mark Zuckerberg is at the top, Facebook is a large organization, with likely more complex motivations than any individual.
To what extent does it even make sense to speak of the "motivations" of a group of people, insofar as they aren't unanimous? Has anyone done a study on whether this provides any predictive power? It seems plausible to me that a group's "motivations" are just stories about what people in the group did.
That our culture has seen to directly associate cash value with 'intrinsic' value is another issue entirely.
No, it's actually a very important point. Our culture bought into unbridled capitalism on the basis that it would produce a meritocratic economy in which market value approximates social ("intrinsic") value. If that is a lie, we have every grounds to reevaluate our economic model for our own good.
The question that the article is trying to answer is: why did Facebook pay 1 billion dollars for Instagram?
We can't, of course, argue that, since Facebook paid 1 billion USD for Instagram, Instagram is worth 1 billion. Simple circular argument. So, why did FB pay 1 billion dollars for Instagram?
Now, the article compares the New York Times, a well established, global corporation, which reaches millions, has lots and lots of world-class talent, physical assets, and a defined business model with profits, as an alternative buy to Instagram. Which consists of 37 million users, most of them in Facebook already, and no clear business model. For roughly the same price.
And it asks us to consider what choice we would make, supposing we were on FB's board of directors. That's it. No deep questions on the fetishism of commodities or the marginal social value of this transaction.
For the millionth time, FB did not "pay" 1 billion, they gave Instagram an unspecified (and probably very low) amount of money and a quantity of pre-IPO stock. FB paid almost nothing, their risk is trivial, Instagram's investors however have had their bet on Instagram converted into a bet on Facebook.
I don't think Facebook believes they'll make more money buying Instagram (I'd be will to bet that on a P&L basis the NYT will make more/lose less than Instagram over the next 5 years). I think that they believe their enterprise value will decrease less and this is a defensive acquisition. They probably saw that $100B valuation vulnerable to dropping to $75B (completely made up numbers, just for the purpose of example) if user growth or photo sharing (or some other blech social metric) dropped off in the lock-up period. Spending $1B to preserve $25B of 'value' is an easy call.
Let other people say what they will about the fact that such a easy to reproduce and young startup caused them to drop $1B defensively...
I think people are underestimating the importance of the NYT. If the NYT suddenly disappeared tomorrow, I'd argue that, at least in the near term, it would have far-reaching implications for the US as a society, as a political body, and as a culture. I think it would impact the course of global events in very real ways. The NYT, despite its market cap, is thoroughly integrated into the fabric of the US and serves a number of very important functions.
If instantgram shut down tomorrow, it wouldn't matter at all.
In fact, I think that if Facebook shut down tomorrow it would matter less than if the NYT did.
I have no idea if the valuations are crazy, and I don't mean to be making a point about bubbles or anything else. I just think it might be a condition of contemporary capitalism that "importance" and "value" are in many cases unrelated.
NYTimes is an instrument of the power elite. The content matter that is interesting (culture) and relatively benign is the product of the talent (and they can go elsewhere).
Politically, I personally would welcome the day that says RIP to NYT -- it would be hugely helpful in getting our political system back on the track. We desperately needed intelligent and critical oversight of the state during the past and current decade and NYTimes completely (willfully, imo) dropped the ball. (They completely lost all credibility post 9/11 in my eyes. Please show me the front page headline with pictures of the huge ("tens of thousands") anti-war demo in Washington D.C. prior to invasion of Iraq. We've all seen the one for Egyptians ...)
Regardless of your stated intent, you should be aware that your query comes across as a subtle form of ad-hominum. Let's discuss "all that is fit to print" and not my white chest hair ..
The meaning of ad-hominem is easy enough to lookup. Both your examples are ad-hom, one is less relevant than the other. In neither case are you addressing his argument rather attacking the speaker's motives or character. "How old are you?" is both snarky and ad-hom, moreover the questioner knew he was being snarky.
> how old are you?
The great thing about this rhetorical device is that it is both a fallacious and non-fallacious ad hominem. Asking the persons age is a legitimate question given the question of how important NYT is to public life. It's also a legitimate dig. "Ah. I see what you've done here."
This very well may be true, and I'm not arguing that the NYT is a benevolent force (although I might argue that it's more benevolent than most of its competitors, but that's not relevant here). Only that it's very important and influential. One way of arguing for my claim from this worldview would be that the NYT is obstructing systemic change and preserving an elite. Any one company whose demise would be "hugely helpful in getting our political system back on the track" must be important, right? Would Facebook (not social networks in general, mind you) closing hugely affect our political system?
>if Facebook shut down tomorrow it would matter less than if the NYT did.
maybe to you, but there's literally millions of people who think the other way around. Facebook is much more widely known around the world (especially to uneducated people) than the NYT is.
and yet, the new york times effects every news reporting agency across the world. it's stories define the news cycle, make and brake candidates for president, redefine foreign policy and effect governments all over the entire world.
facebook wishes it did that. if the ny times disappeared, there would be a hole that could not be filled by the other news networks. the quality of news, as a whole around the globe, would suffer. There is no comparison.
we should remind ourselves to zoom out from the california coastline every once in a while.
The NYT isn't as important globally or nationally as you seem to think. Certainly the Wall Street Journal and Financial Times have far more global clout. Arguably, Facebook's potential to influence things like presidential elections with 149 million[1] monthly unique U.S. visitors, just under half the population compared to the estimated 19 million[2] unique monthly visits the NYT has.
I'm trying hard to let your valid points stand out from the rampant homonym abuse (effects should be affects, it's should be its, brake should be break)!
I'm not claiming that the NYT is more famous than Facebook (I have no idea) and I meant to make clear that I'm only talking about the US (although I think the work the NYT does has effects throughout the world).
My argument isn't that people would even be aware of the changes to society. I think if the NYT disappeared, many many areas of American life would be altered in important ways, as I attempt to flesh out in other comments.
I work for and believe in the mission of newspapers, but I beg to differ. I think a more accurate statement would be that if a critical mass of the institutions of journalism as we know it today ceased to exist, it would (and will) have far-reaching implications for society. We casually talk about the death of newspapers, and they will likely disappear, but I think we don't talk enough about the important things that may disappear with them and what we're doing to preserve those things.
As far as the NYT goes however, I don't believe that the impact would be much more than sadness based in nostalgia. The talent that exists there today would still exist, and be applying their skills at other institutions, both new and old.
I'm not intimately involved with this, as it sounds like you are, but it feels to me like the NYT as a paragon of American journalism won't be easily replaced. It's true that the people who work there would find other jobs (at least most of them), but I don't think the value of the NYT is just the sum of its people.
How do you recreate the culture that comes from a history of unrivaled excellence and the role of being the "paper of record" for so many generations? That's not an easy mantle to pull out of thin air. How do you convince a younger organization, or even a smaller organization, to continue to devote resources to cover unprofitable stories like the continuing developments in Tunisia, for example.
Same with Apple, I would argue. Take all the people that work there and spread them out to competing companies and you don't necessarily get the same results.
>>I think people are underestimating the importance of the NYT. If the NYT suddenly disappeared tomorrow, I'd argue that, at least in the near term, it would have far-reaching implications for the US as a society, as a political body, and as a culture. I think it would impact the course of global events in very real ways. The NYT, despite its market cap, is thoroughly integrated into the fabric of the US and serves a number of very important functions.
Take politics for example. The NYT, far more than any other press organization, functions to expose or amplify information about scandals, secret agendas, government mistakes and abuse. It interviews, analyzes and reports on candidates for office in ways that routinely, as in maybe twice a month, significantly impact the trajectory of a campaign and subsequently an election.
Another example is Wikileaks, where the NYT played a very important role on several sides of the story. The NYT is very much responsible, especially within the US, of amplifying, editing, and creating much of the narrative around the major Wikileaks dumps it was involved with. And they aren't always a force for "good", and have done a lot to damage Assange's reputation and helped marginalize Wikileaks.
I don't think everything the NYT does is great, but they are a hugely important part of many many world-scale developments.
You could write similar things about its role as an arbiter and editor of culture, about its influence on the public discourse and the ideas that permeate contemporary life, on its role in business and consumer culture (Foxconn, as a recent example). It touches so many things, and reaches so many, as those in tech might call them, "influencers," that it permeates American life, directly and indirectly.
A shockingly large amount of non-PR driven, non-public event stories originate at the New York Times and are simply rewritten and repackaged by other news organizations.
It is a good bet that what is printed in the New York Times in the morning, goes on tv at CNN, MSNBC and even FNC for the day.
If the NYT shut down can you give a few examples of some of the "implications"? Granted, the NYT is a prestigious, old publication, but you've given me no reason to believe there would be far-reaching implications "far-reaching implications for the US as a society, as a political body, and as a culture." Honestly, that sounds a bit farfetched to me. The New York Times is a newspaper. It has a print circulations of less than 2 million people. If Facebook were a country, it'd be the third largest country in the world. Hundreds of millions of people use it daily, the New York Times--even in America--doesn't have nearly that type of penetration.
As I mentioned in a comment earlier this week: to many people, Facebook is the default communication medium for a large number of people. You can bet your ass it would matter! There are many sources of news that people can reach to. But people tend to stick to only a handful of communication mediums. Could you imagine if 'email' shut down tomorrow?
Didn't say it wouldn't matter. The NYT isn't a vehicle for conveying news. That aspect of what they do is replaceable. They are, moreso, a discoverer of news, and also an editor of both news and culture. I both roles, they are incredibly influential per my other comments.
As someone else pointed out, a lot of that news if it pertains to current events (as opposed to, for example, startup news) either comes from the NYT or from press releases or PR people.
Again, not claiming Facebook isn't very important, nor that it doesn't impact individual people directly more than the NYT. But the NYT doesn't just reflect what's happening in the world. In doing so, they also profoundly influence what's happening.
While I haven't been following it lately, not long ago the NYT was reported to be worth approximately the market value of its real estate holdings (that is, the paper itself was essentially worth nothing).
That may be shocking, but it's happening everywhere -- Newsweek was supposedly sold for $1.00 and the assumption of its debt. I certainly wouldn't be putting any money into print-based media.
Well, remember the same thing happened with all the movie studios in the late 1980s - someone sat down and calculated that the market price to buy a studio was less than what they could get by selling all the shooting lots in Century City to a real estate developer. This was also just a few years after the studios freaked out that the VCR was going to put them out of business. There were a ton of takeovers of the studios after that, but it's not like movies aren't still around and still profitable. Of course, their revenue model has changed significantly since then.
Of course, the same thing also happened to Silicon Graphics in the early 00s and they really are dead now. I'm not saying it's not a worrisome sign for print media, just that it doesn't necessarily mean they won't make it through, albeit with lots of changes.
It happens all the time today. Companies like Sears and Burger King have been taken private (through leveraged buyouts) to unlock the value of their real estate (i.e., sell them).
Richard Gear's character in 'Pretty Woman' made a living out of just that; the sum of the values of the parts of some companies is more than its market value (Price to Book < 1).
(Then he fell in love with a red-headed hooker and decided not to break up a ship building company, and help manage the company to build more ships instead.)
Not to nitpick, but SGI is not actually dead - they're Rackable with the SGI name. And FWIW, if you're looking for hardware, their pricing and configurability is really great.
Something's only worth what somebody else is willing to pay for it. Try buying the NYT for $950 million one share at a time. You will actually drive the price up, since there's displayed demand. The market cap is just the sum of all of its shares multiplied by the last price the share traded at. It would take considerably more to purchase the entirety of the company.
That being said, Instagram sold for an outrageous amount. But this article is rather naive in how stock markets work or how companies are valued.
You actually still would be extremely unlikely to succeed in doing it because of the dual class stock structure. Most of the actual voting power is in the Class B shares which are owned by a family trust which can't sell shares to anyone outside the family.
You're right about that. I didn't consider people buying and holding expecting zero real returns, vs eg T-Bills which might offer negative.
But my point was that you'd be merely matching an offer that they'd already implicitly turned down because they expect a better offer later - sell their share of the company at the current market cap.
That can include capital preservation, e.g. maybe you'd rather have exactly 100% of your portfolio value in real terms in 20 years than 100% now, since you believe the market will go down.
Instagram took arguably the most important part of the mobile social process—taking photos—and made it cooler than everything else, including what Facebook, was offering.
As for the NYT v. Instagram argument, I think we can all agree the NYT's social value may outstrip its economic value. The outrage about the decline of the NYT should've started when Craigslist started offering free listings.
I've been in the computer business all my life. I've learned something: there is no place on Earth where ridiculous amounts of money is spent on ideas that may or may not make sense like it is on tech.
I've seen companies spend millions on mainframe computers used for transferring text files around, which a handful of pc-sized servers could probably do just as well.
The "easy" money in the technology sector is something that should be seriously investigated IMHO. I think everyone who works with technology has seen their share of suspicious deals. The question to ask is often: who is providing the easy money, money which can be "wasted" as long as it produces a profit?
Facebook ran on investor money up until a short while ago(a short while in major corporation age, what, 2 or 3 years?).
I wouldn't be surprised if Apple bought Instagram. But Facebook is not even established as a blue chip, it's not a money printing machine, and it just pulls U$ 1 billion out of its pocket and buys a photoshop thingy???
I find this deal hard to understand. I think U$ 1 billion has just been efficiently moved from place A to place B and that's as much sense as I can make of it.
It's even worse than that. The $1 billion is largely in stocks from what I understand and parts of it are vested. This means that the stocks don't actually move from one place to another slowly over time. Further, this is not actually money. It's based on what people think the value of Facebook's stock is. That value can go up or it can go down.
Personally, I think the current state of valuing user data so highly is insanity. I suspect that this purchase will later be used as a prime example of another bubble, but this time a marketing bubble rather than a tech bubble.
Well, I can think of one conspicuous counter example from the world of banking - the RBS acquisition of ABN Amro for £49 billion with practically no due diligence and which almost destroyed RBS (which would had caused utter chaos had it collapsed).
What this analysis fails to point out is that the NYT company has about 2.3 Billion dollars of liabilities. Instagram is presumably debt free. Thus if you look purely at the market value of the business, instagram is still worth less than one third of the NYT.
People complaining about the troubles of newspapers tend to forget how in the nineties, when newspapers were doing very well, they all got greedy and loaded themselves with large amounts of debt in order to go on monopoly seeking acquisition sprees.
The New York Times, according to a quick Wikipedia search, has a (print) circulation of <2,000,000. They also have several hundred thousand users subscribing online (this number is to be taken with a grain of salt, it's my own estimate after perusing Google). The NYT has been around since 1851. Instagram was founded two years ago, and already has 27 million users--and its Android version is not even a month old. I know owning a company is different than investing in one, but if we stripped away their names and cultural stigmas, I think most people would innvest in--and own--Instagram over the NYT.
I think the point is that it is sad that yet another social media app is worth more monetarily than The New York Times which is one of the finest new sources in existence.
But "worth" is such a subjective word. Instagram is only worth 1bn to Facebook, whereas the NYT's value is derived from its market cap. And being "one of the finest news sources in existence" (which I don't believe) does not necessarily denote monetary value. With that said, I'd assert that Instagram's value does not truly reflect its market value—it's only the value that Facebook saw in it. The NYT's value does reflect its true market value, as it's a publicly traded company. Again, I'd still invest in Instagram over the New York Times any day of the week.
"The New York Times which is one of the finest new sources in existence."
Really? I've read the times for almost a decade and just can't agree with that statement. I hardly bother anymore, unless it's to peak at Thomas Friedman or David Brook's opinion columns. I just don't find the quality of writing I'm looking for.
If I want to inform myself on an issue, I'm looking to the Economist, the Atlantic or Financial Times. NYTimes is barely on the radar to me shrugs
Don't get me wrong, the New York Times is a phenomenal brand, but they're just a run of the mill above-average news source IMHO.
The NYT may well be worth less than its current market cap, given that it has a very high overhead in terms of its operating costs, has to manage a lot of people, and is losing money - see their own reporting at http://www.nytimes.com/2012/02/03/business/media/quarterly-p...
The NYT is shrinking, Instagram is growing - that too, matters.
From what I've heard they are paying mostly in stock, and a lot of people think Facebook itself is overvalued. So paying $1B with overvalued stock to buy an overvalued company seems to make sense.....
As someone who works for the Times, it's nice to see the general sentiment of value from folks in this thread.
There are a bunch of folks saying that comparing acquisition price to market cap is apples vs. oranges, which may be true ... but how about market cap to market cap? By that yardstick, Yelp.com is worth 1.5 times The New York Times.
You couldn't by the NYT as a whole for its market cap. Companies are almost always bought at a premium, as the sellers receive some of the value that is generated by the transaction itself (actually, there is some evidence that the sellers receive all the value generated by the transaction).
I think, all things being equal, I'd rather own the NYT than Instagram. Which isn't to say that Facebook didn't make the right decision (i.e., to forego buying the NYT), but that value is relative.
Would you rather own one of the most established news institutions in the modern world or a 2 year old photo sharing startup? How is this even a question?!
He should buy the New York Times too, and make their articles free to logged in Facebook users. That would bring me back to Facebook more than instagram will (nothing against instagram - it's a great app).
Ha, that was my thought experiment, too. Doesn't seem to be a fit with the current demographic of Facebook, but Facebook is trending towards a "social media conglomerate" to the point where it would almost make sense. Interesting play. (Though back to the point at hand, I doubt you could buy the NYT for $1B, value or not.)
I fail to see why the title uses speech marks, Instagram is worth $1bn. It happens to be more than the NYT because that's the price the market has determined for the companies.
At this point, Instagram's primary value is in its brand. I never used it, but heard about it so many times that I was under the impression it had been around for years. It might have 30 million uploaders, but hundreds of millions of people are aware of it. For an 18-month brand that is perhaps the most meteoric rise in history. If you consider WPP's brand value estimates (Apple $153 billion, Google $112 billion, Facebook $19 billion), the number might not be so weird.
The value of brand awareness is also inversely proportionate to how much brand awareness you already have. When you're Facebook, more brand awareness may not be the primary motivator.
I think it's also safe to say that Facebook, and Instagram are worth more because they're more personal. In terms of the greater good, The New York Times probably serves a greater purpose, and it also costs more to run. In terms of the individual, Facebook is worth more to them. It seems like these social products deliver more value to individuals, and so going forward are going to be worth more then newspapers.
I always find it very hard to grasp the value of software companies intuitively. If Facebook is worth $100b right now, it is already bigger than Amazon or Siemens! Of course a huge part of the value is an x% chance bet on future growth / future ability to monetize and doesn't reflect the current status you can see - rationally I can believe the valuation is defensible but emotionally I always think "No way!"
and you'll see that Siemens had an EBITDA of eur 9,242 million, while Google had an EBITDA of 2.79 billion
Facebook has a projected EBITDA of 2 billion or so, based on 250 million in 4th quarter earnings.
So, if you applied traditional valuation methods, Siemens should be worth more than Google or Facebook. However, Siemens is more stable, while both Facebook and Google haven't tapped into more potential sources of income, and that's what investors are recognizing by valuing it that way.
I think that's exactly what they're doing -- except in this case I think Instagram was more of a direct threat to Facebook's core business than, say, YouTube was to Google's.
Google was like a big castle with a moat protecting it. YouTube was just a moat -- no economic castle yet. Google bought them to add to their moat and further protect the castle.
No way Instagram is worth $1bb as a standalone, going-concern -- but as a defensive play for FB it might be.
All back to Clayton Christensen: modular systems disrupt integrated systems. Microsoft, Intel disrupt Apple, IBM. Instagram, Twitter, Pinterest disrupt Facebook.
The NYT lasted longer. Building a business that survives through generations is not to me sneered at. Yes, in these times of unthinkable market reach a new biz may get a speculative valuation (although some think it may be defensive), the NYT brand is/was classic.
Here's the thing: it's not real money. It was a part cash and part shares deal, and the facebook valuation is fantasy till they float. So what they were really arguing here is a) how much cash they could get out now and b) how much instagram is worth as a proportion of facebook.
“It’s hard to find a mathematics in which Instagram worth $1 billion in cash, but in pre-IPO stock, Facebook could stomach the hit.”
This statement might make sense if Facebook were cash strapped, but in fact Facebook has plenty of cash. By paying in pre-IPO stock that is likely to be worth a lot more in a few months, Facebook is probably getting a bad deal compared to Instagram investors.
It’s true that some people think Facebook is overvalued, but there are also analysts who believe Facebook is fairly valued (http://aswathdamodaran.blogspot.com/2012/02/ipo-of-decade-my...), and few are arguing it’s as overvalued as, say, Groupon was at IPO.
This is a ridiculously misleading post, cannot believe its on the front page. The NYT is worth approximately $1.5B. It's market cap is $928MM, its debt is $773MM and cash is $175MM. Enterprise value = Debt + Equity - Cash, so that puts it around $1.5B.
Market cap is a commonly used method to measure the company's worth, as determined by the market. If everyone agreed that NYT was in fact worth 1.5B, its market cap would have been 1.5B.
Also, there are many companies that have negative EV based on that formula, yet are still functioning businesses.
Totally incorrect? The value of the equity is simply "assets minus liabilities", a.k.a book value, which can be completely different from the market cap in dollar terms. And thanks for the downvote.
Yes - totally incorrect. You are mixing up multiple concepts here. Book value is just that - what the accountants come up with for the books. The value of debt is how much the debt is worth. The value of the equity is how much the equity is worth (that is, the market cap). None of those are equivalent to the value of the company.
Suppose I pay $60k in cash and take out a $240k mortgage to buy a house. The $60k is equity (market cap), and the $240k is debt. The value of the home is $300k. It works the same way with companies.
So you paid $300K for the house, effectively establishing the last trade value, i.e. the market cap, a.k.a. what "market is willing to pay for the property", at $300K. Not $60K.
You're still tripping up. Forget about houses. Say I buy 100% of the stock in a business for $60k. The business then borrows $240k. When profit comes in, some of it goes to the bank who owns the debt (giving the debt value), and some of it goes to me - the owner of the equity (giving the equity value). So both debt and equity are valuable - they are claims on the business's cash flows.
Now suppose someone wants to buy the business. I still have $60k worth of equity (100%). Do you think they can buy the entire business (claims on ALL of it's cash flow) for $60k? Of course not. They'd have to pay off the debt AND buy the equity. That number is $300k - the enterprise value.
Market cap is defined as the value of the outstanding equity (share price x number of shares). Period. The value of the company can be, and often is, much greater because most companies choose debt as part of their capital structure.
Startup tech companies like Instagram rarely do that. Nobody lends us money, so we're stuck with equity. So for Instagram, Market Cap (if there is such a beast for private companies) IS the enterprise value. For the NY Times, market cap is but a percentage of the enterprise value. So it turns out the headline of this article is actually quite incorrect. The NY Times, in any way you can measure, is clearly worth more than $1B.
Look, I totally get the debt part of the valuation, and what enterprise value is. I also completely understand that enterprise value is an important measure of valuation. All I'm saying is that using market cap to indicate the value of the company is not that misleading either. Enterprise value is just one way to value a business, there are others. It's not precise science.
So in your latest example, and also throughout the thread, you're confusing (or using interchangeably) the concrete sale price and a fuzzy intrinsic value. Why would the buyer of your business pay $300K upfront? All other things being equal, the sale price of the business would still be $60k, and they can be paying off debt for the next 15 years for all I know. The conventional media-reported value of the business would still be $60K, and it won't be very misleading.
In addition, not all debt is created equal. A company like Google can probably easily get, say 1B of super cheap debt on favorable terms, while something like Barnes & Noble would barely get the same 1B at much higher interest rates and repayment schedules. It's still 1B in enterprise value, but it's clearly not the same debt.
You also mentioned cash flows. So to continue with your example, if your business is actually losing money hand over fist, and has negative cash flow on top of $240K of debt, what do you think its value would be? Would it be equal to your simple enterprise value formula? What if the same business is growing at 100% per quarter with super high operating margins? Enterprise value can be just as misleading.
To make Times worth about a billion dollars (it's market cap), you need to believe that that $700M+ of debt is totally worthless to the debt holders. That isn't some fuzzy detail. It's a fundamental concept that the author of this article ignores (or doesn't understand).
Not totally worthless, but most likely not worth the full $700M. They have $2.2B in Plant/Property/Equipment on their balance sheet. Then they have $500M+ of goodwill and intangibles. And only $500M of equity, which is constantly declining quarter after quarter. One stupid move, and the equity is easily wiped out, leaving debtholders with goodwill and a bunch of newspaper printing equipment.
Sticking with houses, if you buy a foreclosed house for $200k (the "market cap") and assume a $300k outstanding mortgage, the house's real value is closer to $500k.
Further sticking with houses, if the officially appraised value of that house drops 40% since the said mortgage was issued, and comp sales in that neighborhood are 50% lower, the house's real value is nowhere near $500K, no matter what the formula says.
You'd still owe $300K in mortgage, and be out $200K of cash, but that doesn't mean the house is worth $500K.
But no one is going to spend $200k for a $300k mortgage if the house's value is significantly less than $500k. The price you would be willing to pay is basically the house's value minus the outstanding mortgage.
Well, it could decline in value after you buy it. The point is that having debt of $N doesn't always mean the value of the house is automatically adjusted by $N. Value is in the eye of beholder, or buyer in this case.
The revenue potential of the NYT is well known and has been steadily declining, the potential for the Instagram is largely unknown but it is known that the internet space is rapidly expanding.
Instagram like the NYT is a business and as such is usually bought or sold with regard to it's potential to generate income, rather than it's social impact.
The liabilities for Instagram are 12 people's salary and a few servers, the liabilities involved in the NYT are simply astounding, reporters salaries, print shop salaries, marketing salaries, buildings, etc.
Instagram has people pay for the privilege of giving them content where as the NYT must pay others for their content, that difference alone is very important.
Few years ago a 2 years old startup with no revenue was acquired for almost twice what New York Times is today. Now this startup helps to bring more than $1 billion in earnings. The name of the startup is Youtube.
Facebook know exactly how much Instagram is worth. They don't even have to ask the data from Instagram. They can just look at their own Facebook data to see how many of their users use the service. Also, every photo you see on the web has a Facebook Like button. They have all the data they need to make the decision.
Looking at their data, Facebook feared that not acquiring Instagram is a risk to their business, so they rather lose $1 Billion than giving advantage to other social networking sites such as Google+. Mark Elliot Zuckerberg is determined to stay on top.
The NYT needs to admit their mistake and heed Steve Jobs's advice from the grave: lower the subscription price. $5-10 a month? We'd all pay. $40 a month: are they crazy?!
Is there a 1% chance that the enormous rate of growth of Instagram would have continued for a few more years to produce a social network the size (and profitability) of Facebook?
If so, that's a justification for Instagram being worth roughly 1% of Facebook.
I guess it is also worth slightly less than 800 AOL patents. I think it is just how much someone will pay for it vs "worth". How can you really arrive at an estimate that NY Times ~ Instagram ~ 800 Patents anyway?
Instagram was worth $500 million right before the purchase. it got doubled to 1bil
If nyt was gonna get bought it would get multiplied by 2 so around $1.9billion.
Yeah. It makes no sense. It's like comparing apples to oranges.
Acquisition price reflects the value to the acquirer; market cap reflects the value to the shareholders. Neither reflects value to society - something completely unrelated.
Raison d’être. I don’t know how threatening Instagram truly was to Facebook. Sure, they’re both social networks, but serving very different purposes. Instagram will remain running and separate from Facebook. The move is probably just the good sense to get in on a growing company that they can integrate with their platform—doubling, of course, as a defensive manoeuvre.
It's not. It's just crazy to think that a web app with $0 revenue that's been around for ~2 years can be worth a newspaper that's been around for over 150 years and has won more Pulitzer Prizes than any other news group.
It seems crazy but it isn't really. What if NYT has a lot of debts? It could be worth negative amounts, since the new owner could be responsible for those debts.
There are plenty of ways for a large company (especially an older company) to have a neutral or negative market cap, since that is based on its profit potential, not on how much economic activity it creates.
I think that it is easy to confuse worth in terms of cultural value, historical value, and monetary value. Is Instagram worth more monetarily? Yes, in the realm of advertising, Instagrams user base is right smack in the center of the target demographic sought by many advertisers; the 12-30 crowds.
Historically and culturally speaking, I believe that the NYT offers far greater value. But, who wants to spend $1B on historical value?
