One of the highest profile liquidity events in the first half of 2012 was Facebook’s deal to acquire Instagram for $1 billion. The popular mobile photo-sharing service should fit well into Facebook’s growth strategy as a public company, but its eye-popping valuation — more than that of the New York Times, for those keeping score at home — is made more extraordinary by the fact that Instagram, at the time the deal was announced, was run by only 13 employees.
Setting aside questions of unique strategic value for the moment, what could possibly make Instagram worth ten figures? Brand recognition, goodwill, user loyalty, mushrooming usage metrics, sure — but perhaps most importantly, a mountain of intellectual property. My quick-and-dirty assessment, based on pure speculation with no inside knowledge, produced the following taxonomy:
- Technology, consisting at a minimum of a consumer-facing iPhone app and the server-side innards that handle connections and communications with other users and social networks. Most social media sites and services, at their heart, are gigantic databases connected to Web servers that render the stored data as Web pages, images and other content.
- Branding Elements including the Instagram name, logo, domain names, trademarks and other identifiers, which nowadays can include everything from Twitter handles to Facebook pages and even vanity domains.
- User database containing personal information from more than 30 million registered users
- User-generated content: In Instagram’s case, a vast repository of more than one billion photos contributed by those users, not to mention the 81 comments per second posted on those photos
- Proprietary content and design: Admittedly modest by comparison, but it would do the designers a disservice not to give a nod to the app’s user interface.
I won’t even attempt to quantify these categories of IP, but it should be intuitively clear in the case of popular social media businesses like Instagram that the lion’s share of value is in the gargantuan databases of user-contributed information and content. That data, when combined with each user’s unique social graph, makes Instagram 100 or 1,000 times as valuable as an obscure competitor. These network effects erect a formidable barrier to entry, as Facebook itself has shown.
- Web and mobile businesses are global in reach. No reason to make it easier to be sued. Why not require that all claims be brought on your home turf applying local law? Better yet, in the wake of the business-friendly AT&T Mobility decision by the Supreme Court, consider requiring 1-on-1 arbitration and a waiver of the right to class action litigation. (See discussion at the end of my prior post about crowdfunding.)
Adapted with permission from a previous post at Gust Blog.