Are you interested in what's going on behind the scenes of the tech world? You know, the business end of it. Well, I am. I often wonder what folks in investment banks, acquiring companies and involved financiers are thinking when they buy a tech company. There does not seem to be any rhyme or reason for the outlandish sums paid - at least not a clear profit and loss or transparent explanation based on sound and prudent economic principals.
There are so many examples that can be highlighted, but here are a couple:
Instagram:
In case you've been hibernating or hiding under a rock over the past few months you're probably aware that Instragram was sold for 1 billion dollars...yes, you read correctly...1 billion dollars! But why? They must have been bringing in at least one to two hundred million dollars of revenue per year (at least projected), right? Wrong. Instagram did not have a monetization engine. In fact, as far as I know they did not really even have a monetization strategy. But why would FB pay for a photo sharing site that doesn't make any money? If you're afraid to ask this question because you feel silly and surely the bankers involved must know something, don't. It really is that simple. Buying a company that does not make ANY money for an unreasonable price is not logical. Period.
Then why...
1. Facebook has a lot of money so they can do it.
2. As CEO, Zuck can make arbitrary decisions like: "which hoodie should I wear today and should I buy Instagram for 500 million or a billion"? hmmm..
3. Rumor has it that Google was courting Instagram and FB could not afford to give G+ a one up feature advantage.
4. FB has an underdeveloped mobile strategy and they were worried that Instagram would become a dominant mobile social network and eventually cannibalize their traffic
5. An extension of point 4: with a looming IPO and criticism of its mobile strategy, FB thought that making a robust investment in mobile would assuage wall street and convince investors it was a good buy.
Motorolla Mobility:
Google is famous (or maybe synonymous?) for using its deep pockets to buy pretty much whatever they like. What do they like? Well I think it depends what mood they're in as they seem to average roughly 15+ acquisitions per year. Here are some of the more famous ones: Doubleclick for $3.1 billion all cash), YouTube for $1.65 billion (all stock) and most recently Motorolla mobility for 12.5 billion...and as an FYI, as of June, Google had $39.1 billion dollars of cash reserves (in other words money in the bank). This means that the acquisition is worth 30% of their total savings. It would sort of be like one of us spending our nest egg to buy that condo, co-op, or house..
Then why...
1. Google has placed BIG bets on mobile as they see it being the future. Fact: in the developing world mobile is a first screen experience as they tend to lack the infrastructure to have broadband widely available at affordable rates.
2. Apple recently outbid Google to win $2.6 billion worth of valuable patents. It is believed that Motorolla mobility has its fare share of patents as well.
3. Android has been a success as in the aggregate; it has more marketshare than any other smartphone globally and this will only increase as Google floods the market with lower cost Android handsets that will catapult the growth of new users in India, China, Indonesia etc..to upgrade from their feature phones
4.. An extension of point 3: Apple, Apple, Apple! Google and Apple once close friends (in fact Eric Schmidt used to be on Apple's board of Directors), are now fierce competitors. Google started with a great idea: make Android software free to handset manufacturers to increase its market penetration. Guess what, it worked! So what's in it for Google? Well, the more people that user Android powered phones the more Google can brand itself through useful pre downloaded apps like Maps. But more importantly, more people search on Google and therefore click on more ads thereby making Google no. 1 in mobile advertising. Guess what? That worked too! Google earned $750 million in mobile ads in 2011 giving it 51% of the total market. But guess what? Apple made $100 billion dollars last year! And much of that was from selling iPhones. Moral of the story: there are super high profit margins in selling mobile phone hardware and Apple is owning that market. Maybe Google wants to shift strategy all of a sudden?
So reader, I ask you: was Instragram worth a billion? Was MM worth over 12 billion? You tell me. Comments welcome.
-DBO
