Does $1 Billion Instagram Purchase Prove Social Media Bubble?

Facebook has just spent a lot of money to purchase a photo sharing app that costs zero dollars to use and has no source of revenue. That sounds to us a lot like a bubble market. 

What's the Latest Development?


Facebook has just spent an awful lot of money to buy Instagram, a photo sharing app which costs nothing to use and has no revenue source. To some, it confirms the recent mumbling over a possible social media bubble. "There's widespread agreement that bubbles occur when a speculative mania causes the price of an asset to soar far above its intrinsic worth," wrote the New York Times' James Stewart last July, referring to LinkedIn's possible over-valuation. For social media companies, value usually comes from advertising revenue or selling a product to the public. Facebook advertises, for example, and Zynga sells games. 

What's the Big Idea?

Instagram does not really have a business model at all. But for Facebook, the photo app's value likely comes from its popularity, which went from 5 to 30 million users in the last 10 months. Some tech analysts say that Facebook, which already has integration with Instagram, has just bought the competition. As for a new tech bubble, the fact that we are even talking about one may mean there is no bubble. 'A key characteristic of a bubble is that no one thinks it's a bubble. If everybody's upset, it's a good sign,' said Netscape founder Marc Andreesen. 

Photo credit: shutterstock.com


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