Lessons from Facebook’s Instagram deal: Screw accountants, trust social

Accounting be damned! Valuations and the science of accounting can never justify the pricing decisions of the new internet gods. What’s a billion amongst friends, a billion US dollars that is? Plenty will be written about why Facebook bought Instagram for that sum. As a Chartered Accountant the right side of my brain is feeling a little battered.

Where is the return on investment, ROI, where are the valuations that make sense? Stepping back for a moment, is the ring of a billion just too compelling? Why settle for anything less?

I am not sure I would if I could. Tech has never played by the rules. The tech bubble of the turn of the century in 2000 was a small forerunner for what was to come. Prior to 2000 we had all grown up in the business world of the tangible. You made a widget, you sold a widget, or you supplied services to those that made widgets. Widget salesman made money by exceeding their widget targets, and all was right in the world. Company valuations were tangible and justifiable by mostly cold hard facts, as well as smart grey accountants.

Technology has rewritten the rules and the books. All it takes is nearly a billion followers or participants in your vision, once again the magic billion pops up, and all the old school accounting lore is out the window. You can’t touch the billion followers, you can’t even really quantify or value them in simple understandable terms, they only exist on servers virtually and globally, but Facebook, as the “owners” of all these lives online, can and will now set the rules, all the rules.

Accounting as a profession is changing. The various merchant banks and financial advisors are also under huge pressure to change, as many have a vested interest in playing up the hype that technology has brought to various financial markets. Both groups still have a vital role to play in the connected business world, I just don’t think the accounting profession, and the financial services industry, have fully realised how much the rules have changed.

Socially connected people and business can move fast, faster than many financial advisors and analysts can advise, communities can form and reform around a new hot application, platform or technology, and then with in a really short time, accounting wise, move on. A perfect example of this is the whole Blackberry issue: In barely a year, the once hot Blackberry has lost 88% of its market capitalisation. Accountants would say the fundamentals don’t support the market price but the market cannot be ignored.

Why would Facebook pay one billion for Instagram? Don’t ask the accountants, they can’t really say. If you ask the hot new kids on the block, the social media mavens, you will get a whole story about how social is the new way of everything, business, relationships, whatever. The simple answer to the question is not based on logic, accounting, or anything that can be truly quantified, Facebook did it because it could. The amount is secondary to the strategic need to be relevant to a billion users with hot exiting new services, especially if those services are mobile based.

An IPO or Initial Public Offering for Facebook, of around US$100-billion, is on for the American Summer. Endless chatter will ensue about how it can justify that valuation. Whether or not it will also depends more on sentiment, the views of the market, and the hype surrounding Facebook. The purchase of Instagram will only fuel that particular fire, in a very positive way. In the context of the impending IPO — and taking the fact that Instagram for Android was downloaded one-million times in one day into account — a billion dollars starts to look like pocket change for Facebook.

Time will tell if this is another tech market bubble. I for one don’t think so. I am certain that the internet economy will blaze a trail of new value and valuations for companies involved in it.

Accountants and economists will follow on and do what they do best , that is find all the answers to yesterday’s questions, and they may even figure out a model for why in the end. By the time they do this I am sure Facebook, or whoever is the current hot new social leader, will go right on rewriting the rule books. One thing’s for certain: US$1-billion probably won’t seem like a lot of money by then.