10 Lessons | $1 Billion Facebook & Instagram

It was the equivalent of a hurricane that hits a barn on a sunny Sunday spring morning without warning. It shook up the Startup world and has probably changed the ecosystem for years to come.

Monday night was when twitter suddenly started heating up with the news of Instagram being acquired by Facebook. The price tag was revealed shortly thereafter – $1 Billion.

Since then there has been an outpouring of disbelief, anger, frustration, befuddlement, confusion and lots of online petitions. Most people I know of are just plain angry at this development.

Its almost as if ‘yin’ and ‘yang’ decided to get together.

Facebook, the world’s largest and most profitable Social Media company, the ubiquitous factor (and sometimes determinant) in the social lives of millions of people, decided to snap up Instagram without the VC and Analyst community even getting a whiff of the deal. The deal may go down in history as one of the most secretive and probably the most expeditious for $1 Billion Dollars. The last time something like this happened was… er… never.

This deal is seen as over-priced for a startup. YouTube, Skype and a few others were and are also in the same league.

If you thought this post is going to be another digital hate rant, then I am sorry, you have come to the wrong place. I genuinely harbour no sentiments regarding this acquisition apart from abject envy for Kevin Systrom, CEO and founder of Instagram who, along with much of his 6 (or 13) member team, just became a millionaire.

And for what?

An app that turns your crappy iPhone (now android) pics into vintage hipster shots worth putting in art galleries.

I shall however try to explain, through this post, that this app is not just about crappy smartphone pics but much more. Hopefully, we lesser mortals may now learn what that ‘more’ exactly is thanks to Mark Zuckerberg spending a Billion Dollars.

 

10 Things that 1 Billion Dollars have revealed

Being Social is being Visual –This is something Facebook realised, pioneered and has possibly struggled against it since its inception. Remember how people suddenly went crazy sharing, tagging, untagging and commenting on pictures on Facebook a few years ago? The below infographic just shows how many pictures have been created, shared and finally stored thanks to FB. This underlines just how important it is ‘to be visual to be social’. Think about it. Our most social beings, in the offline world, are those who are also the most seen and most heard about. Before the internet came into being, being seen at the right places, with the right people and the right time was essential to increase your ‘Social Value’. Now transpose this concept to the ‘Online World/Social World’ and we see that similar dynamics exist. Your ability to be seen in the right way and at the right places ensures a certain ‘coolness’ to your reputation online. Suddenly when people see something they like, (a picture of a sunset, a party, a concert) they comment and this leads to a growth in Social reputation. Instagram is a mobile only social network for sharing kick-ass photos and hence increased the social reputation of users by making them seem cool. The fact that you don’t have to put actual hard work but just use simple filters helps!

What Mark Zuckerberg bought – It’s no secret that Facebook considers itself to be a ‘Design’ driven company. It is also no secret that they really suck at design. The Facebook app on my Galaxy Note sucks battery and has a number of features missing. The fact that a $135 Billion Market Cap (Some people value FB like that) social tech behemoth with thousands of employees and $4 Billion cash sitting in the bank can’t make a decent app is disturbing. It also means that while users are moving to the mobile platform for Social Networking, Facebook has stayed far behind. For that matter even LinkedIn doesn’t have a great app. But then again, most people who use LinkedIn don’t mind using it on their laptops or tablets as they see it as a business tool/network. So what exactly did Mark buy?

Largest photo sharing app in the world – 30 Million iPhone users and probably 6 million android users

Tons of Mobile buzz – 5 million android downloads in 5 days. 340,000 waiting list before it was launched.  

Mobile stickiness and pics – 1 Billion uploaded pics, 5 million pics uploaded every day

Startup – 2 years old and 13 employees

Monetization Strategy – None

Cash Flows – None

Consumer Love – Lots

Stickiness IS a business model – After the 2009 slowdown, a certain amount of much needed rationalization set into the startup world with startups defining revenues models, monetization plans and related issues at inception. Unlike before when startups with ‘cool’ ideas were funded only because they may eventually have millions of followers, VCs also became aggressive in their search for startups that made business sense. On the whole this made sense and lead to a tempering of the market. But this also might have led to ‘uncoolness’ across the startup landscape. With this acquisition, Instagram has shown that startups and VCs can expect to make a pot of money and cash out if their product/service has lots of users who swear by their name. Most importantly, if the product/service shows great ‘organic’ growth with lots of passionate following and evangelists, you are assured that people will be interested in buying you out. The reason is that with our society’s short attention span, consumption and gimmick driven worldview, to have a product/service with large, genuine and engaged long term following is a great asset in itself and this means much more than just a substantial place in the ‘Goodwill’ section of a balance sheet.

Social is now Mobile – This one is a no-brainer, but since many of us are devoid of suitable grey matter, I shall spell this one out. Social Networks need to have substantial and comprehensive presence on the mobile platform to survive. Over the last year I along with tons of my tech savvy friends, have moved our primary consumption of media (primarily articles, blogs, newspapers etc) from laptops to our mobiles. The young and the social tech savvy, thanks to BBM, twitter, whatsapp and ‘hyper-sms-ities’, feel comfy with this tech and drive the demand + consumption of social apps. The fact that laptop face time is reducing in comparison to mobiles, due to their ubiquity, makes the transition a pressing matter for social networks.

Google better watch out – Instagram has 1 Billion pics. But just try and Google one and you won’t find any apart from those which have been posted or reposted on blogs and pages. Not try googling Facebook statuses, pages, notes etc. Again nothing. This may not sound like much but the creation of these ‘walled gardens’ is really something that Google is very very concerned about. Their crawlers and search capabilities are kept out of the largest repositories of user created content… forever. It means that socially relevant content for you can never be accessed by Google. It also means that Facebook has now more eyeballs looking at more things for longer and hence more ad money. Oh! And it also owns all your content, pics, videos etc.

‘Frictionlessness’ is the Secret Sauce – Over the last few years this term has really come to define the core of many super-startups. I define ‘Frictionlessness’ as “Qualities and Features in a product/service that makes it easy to use, cool to own, efficient to run and requires the skill of newbie while bringing ‘sex’ (A term used by Steve Jobs for Apple products) to the entire experience of using it”. Instagram, Flipkart, Pinterest, Zappos etc all have this sense of ‘Frictionlessness’ which make them so wildly successful.

Below is what Instragram did for a crappy office Pic I took.

Ridiculous Money Ridiculously Fast – Not many people know that Instagram closed a round of $60 Million of funding, valuing the Startup at $500 Million… just 1 week back. What does this mean? Well it means that maybe Facebook got so jittery of Instagram’s success, especially after the Android release that they put in motion probably the world’s fastest acquisition deal put together at this Billion dollar level. It also means that the VCs who participated in the last round of funding for Instagram (Sequoia Capital and Greylock Partners) just made 2 times their money in one week since the Valuation went from $0.5 Billion to $1 Billion. Considering that they had just closed the round and probably hadn’t transferred the money to Instagram’s account (This is usually done in tranches or in blocks) they might have just made $100 Million for signing a piece of paper which says ‘Yo Dawg! We will fund you for $50 Million’. I wish they start teaching “Venture Capital” as a subject in school because it’s stupid to be an engineer or lawyer or an astronaut when you can double fictional money into real money by signing an agreement. I jest of course; these guys have made this pot of gold only after carefully curating a reputation over decades. The team of Instagram, which is 6 to 13 people depending whom you talk to, has also suddenly gotten a bunch of millionaires and the CEO Kevin Systrom has attained a place in Startup History for posterity. One must note here that while $1 Billion seems like a lot of money (Its after all Rs. 5,158 Crore) it also represents less that 1% of the market cap of Facebook and it actually a cash + stock acquisition. FB has $4 Billion in cash just sitting and making piddly savings account interest so this is not a bad deal.

Prepare for a Startup Boom! (And Bust) – This acquisition is like the gong at a gathering (or trumpet at an orgy) which sounds off the start of a great evening. Expect to see lots of first time and serial entrepreneurs rushing to make photo or social apps as targets for eventual acquisition. Also expect VCs to take the bait and deliver their freshly raised funds to the coffers of these startups. If history is anything to go by and due to reduced boom-bust cycles, I would start preparing for the bust cycle right now. For India however, I don’t expect VCs and entrepreneurs to start gunning for non-monetization business model startups. It just won’t happen. Not yet.

You don’t need to be an engineer/programmer by education– Instagram Kevin Systrom wasn’t a programmer by education but learnt it in his spare time in the evenings. This just goes on to show that you don’t need to brood if you missed the chance to go to an engineering college (I didn’t go to one and it hasn’t been a disadvantage in any way). It also shows that while there were better programmers out there, Kevin Systrom took a simple idea and made technology work for the user by making the experience ‘Frictionless’. Unfortunately most entrepreneurs are working on complex ideas which are further compounded by them expecting potential users to work for the tech they develop.

Facebook = Monster – Ok! Let’s get this clear. People hate Facebook despite using it all-the-time. Even the mighty Google is looked upon with suspicion but never hate. Apple is revered, LinkedIn is respected, Twitter is liked, 9Gag or Tumblr are heavily used and Instagram is adored. But Facebook is just hated. I have yet to come across more than 1-2 articles which rated this development as positive. And even those seemed as if they were pleading the reader to share their point of view. This is troubling for an organization which claims to want to change the world and is going in for probably the most anticipated IPO in the last 5 years. The forced ‘Timeline’ shift on profiles is the latest such change which is reviled and hated by users. Mark should do some soul searching, become a Buddhist Monk or get a new PR agency. I would probably recommend all three.

Social Media under Fire! The Court Order & My Questions

It has been almost a month since I wrote my last post and many of you have written to me, asking me if I had relegated this endeavour to the bin just like many others. I haven’t.

I recently read the Court order related to the case against various Social Media Networks/Companies in India on Pluggd.in (The Court Order) and felt that the drab document contained some exciting and disturbing stuff. This news has been doing the rounds of almost every (English) newspaper and website in India.

So I decided to write a set of Questions which indirectly analyze the possible fallout related to this Court Order. I feel that this may be a watershed moment not only for how we communicate and use social media, but also for freedom of expression, national unity, publication, blogging etc

Its important to note here that this court order is not the final decision/judgement related to the matter but a ‘Summons Order’ dated 23 Dec 2011 which contains a list of the accused, the complaint and the complainants and reasons given by the judge on why the court feels that the case should be heard.

Just like the printing press and the telegraph in their time, new inventions/nascent fields are like the wild west, where for a long time when almost everything and anything goes due to lack of policy, rules and regulations. Indeed, regulation becomes necessary only when authorities know the contours, the effects, loopholes and the potential fallout from activities related to a particular space.

Social Media (in India) is the latest space being tackled by the government, courts, players and regulators. Hence it is but natural that we hear laws, decisions and orders (such as the one I am writing about) baffling.

Part of the problem lies with our new found generational ADD (Attention Deficit Disorder) aka ‘Multi-Tasking’ ‘Trivia-Centered Learning’ etc, part of it with the way we consume media aka ‘Aaj Tak Syndrome’ (through headlines and/or sans meaningful analysis) and part of it is the fact that the overwhelming readership on the net is educated, urban, middle class with secular, idealistic and righteous opinions (I belong to this class).

 

The basic Info

The Judge – Shri Sudesh Kumar

Court – Patiala House, New Delhi

Date of Summons Order – 23 Dec 2011

Complainant – Vinay Rai (Senior Journalist and editor of weekly Urdu, Akbari)

Accused – Facebook India, Facebook, Google India, Orkut, Blogspot, Youtube, Google, Yahoo India, Yahoo, Microsoft (India), Microsoft, Exbii, Zombie Time, My Lot, Boardreader.com, IMC India, Shyni Blog and Topix.

 

The Analysis

1. The court order mentions harm to national unity, riots, inflammatory language, debasement of religions, danger to communal harmony, hatred etc as the among the litany of accusations against the Social Networks and Websites. While this may seem farfetched to many people, however one has to remember that just like pamphlets, newspapers, posters etc a facebook group/page created to incite violence may have the same/similar effect and purpose. Since there is a law to regulate other media, the question here is why should Social Media stay out of the purview? 

2. As per the court order, enough reasons and evidence has been provided to initiate a case against the accused (summons have been/will be provided to the heads of these organizations including some really big names). Putting in big names, ensures that the case gets the visibility that it should. Apart from the legal aspect, it makes great copy too. For various parties concerned, it makes sure that the average guy hears about this. But why include Microsoft? And Yahoo? Last time I checked they had no major play in the Social Media space. Why are they being dragged into this?

3. The accusation includes the fact that many or some of these social networks/websites have colluded and in fact promoted such activities to increase page views, accounts, hits etc and thereby revenues. This is especially troubling since not only is it ethically and morally wrong, it is also inviting Government (over)regulation and control over this medium. And one must not fail to mention the damage this does to the reputation of the fledging world of Social Media Startups. However, I beg to understand how they hope to prove in court that Social Networks have ‘Colluded’ to spread hate messages? Reposting material from one site to another is done by users. How does one create a formal or informal mechanism to co-operate between social networks aimed at increasing page views/hits through lewd, disgusting, anti-community and anti-national messages/pictures? I don’t for a second mean that the accused are beyond guilt. I just want to know how they worked together.

4. As per the complainant, the government has turned a blind eye towards this menace. Will the government now take concrete steps to take care of this? Will there be pan-chewing bureaucrats sitting in front of computers reading out my updates and pages? Will the local police station, with staff that hasn’t been trained on how to use a computer, be able to record an FIR? Or will there be another ‘Special Cell’ set up for this? What will they do? And if they can really control all this, then when can I open Google and expect to see the right map of Kashmir in India?

5. This court order may even lead to clarification on who legally owns the information/content created by you and me on Social Media. If the Social Networks don’t own it, then they can safely say that though they will try to clean up their sites, the legal fallout is not theirs to suffer. If they do own it, then they might as well sell the info which we put up on their sites. So who, as per our laws, owns this info? 

6. Where is the info/data/pages stored? On servers within India or outside. If it is outside then the courts have no jurisdiction over the data. In which case they will have to look at ways to prosecute erring individuals or a company subsidiary or just block the page/website all together. So who should get punished? The company which owns the servers, which leases the servers, which owns the social network, the user who originally posts content or the reposting individual?

7. Who will regulate what is national or anti-national? The Government? That will be scary because we have heard what Mr. Kapil Sibal proposes. Media outlets have been fighting government censure laws for decades. Do we as the middle class have any hope of fighting unjust laws against us, when we can’t even get the cops to register a stolen mobile phone? Will any casual comment against a Politician or Govt Employee seen as defamation and get punished?

8. Finally who discusses standards of morality? Me, You, The Government, The Neighbor… who? Yes, when it comes to disturbing national unity, communalism, ethnicity based hatred and other harassment based material, a line must be drawn. But along with that, the laws must also recognize the fact that this line may be re-drawn and misused? Or are we looking at a future with POTA type laws for Social Networks?

 

I would like to clarify that I am 100% for sound punishment against those who have created such content consciously or otherwise. Even if Eric Schmidt himself must spend some time in Tihar, I believe the guilty must be punished. What I do not stand for is the kind of laws that usually get thrust on 99.99% of law abiding citizens in such situations. Laws, which seek to do nothing more than collate information & control the general population. Because no matter how democratic we become, we can and should never lose the right to express our opinions.

Real Value & Competition – Not among Products but Environments

Today Facebook filed for a 5 Billion $ IPO. To put this number in perspective we must convert it into INR.

Rs. 24,500 Crores (49 Rs = 1 $).

Note:  In 2009-2010, Maharashtra emerged as the state with the Highest fiscal deficit among all states at Rs. 26,562 crore (Yes The Entire of Maharashtra) 

 

Understandably this has led to hoorahs, congratulations, amazement and…. disbelief.

Disbelief because many people, including some of the shrewdest investors, do not understand how the intrinsic value of a young Social Networking site can be valued at a 100 Billion Dollars. After all, with a little less that $4 Billion in revenues last year, its valuation is an unprecedented 25X of revenues. And for a company which is 8 years old and based primarily on the sale of online ads, itself a fast changing precarious commodity, this sounds like madness. 

And it may well be, unless we understand that a major shift has happened in our world over the last decade. Though only recently visible, it always existed in principle, since the evolution of a monetary system because of its predominance in technology and how it has enveloped our lives.

This shift is of Real Sustainable Value and Competition – From Products to Environments.

When we think about competition in a corporate or capitalistic sense, we see images of Coke Vs Pepsi, GM Vs Toyota, Rin Vs Wheel, Airtel Vs Vodafone etc (For ease of understanding I have clubbed Brands and Products as one)

This is because of a number of reasons – positioning of products, market size, penetration, brand connection, loyalty, advertising etc

99% of us, especially well bred, old paradigm educated, propaganda fed students of MBA, think of today’s consumer driven competitive landscape in this way. A vast battlefield of competing logos, brands, strategies, PR activities, taglines and consumer engagement.

But that 1% realises that the paradigm has shifted, in fact they realise that the real paradigm of interest is not to win battles at the battlefield… it is to ensure direct/indirect control of the battlefield itself.

 

No, this isn’t another version of the Blue Ocean Strategy or a treatise on how to control the market with brute force, monopolistic laws or just plain illegal stuff.

I want to show how certain organizations (like facebook) and investors, have gone beyond winning battles i.e. creating better products/services than your competitors, to controlling the battlefield i.e. controlling the environment in which products are created and compete.

 

Now before I tell you how and why, can you name a class/type of organization which makes the most amount of money in the world??

Think Hard.

The answers, surprisingly, isn’t energy, though it is certainly close. It’s called ‘Governments’.

Governments across the world make a ton of money using taxation, excise, customs, surcharges, trade payments, investments etc. And how do they do this? By making laws, controlling the police and the army, collecting taxes, providing security, developing infrastructure, declaring war or peace, developing international relations etc. Basically governments make revenue by controlling the overall environment of a country. Yes, Governments do run for-profit companies, but they constitute a small portion of total revenues.

The USA, understands this and hence profits from the commerce of crude Oil. Hence, it is susceptible to jitters from its relationships to Oil Exporting Countries. Its focus on securing and stabalizing sea routes, pipelines, countries and infrastructure for oil trade is partly explained by the fact that Oil is traded in Dollars in the world’s main futures exchanges – NYMEX (New York) and the ICE (Europe). Add to this the American companies which control the technology, resources, expertise, infrastructure, connections, distribution and delivery network. What you get is a Government-Corporate complex which controls the Crude Oil Industry in the world (The Environment) without having the oil reserves, even to service its own needs.

 

But what about Facebook? It is not even close to the kind of influence and power that is exhibited by the above 2 examples. 

Well, Newsflash! It’s not just Facebook, but Google, Apple, Windows, X-Box, Salesforce, Amazon, eBay and many of the other New Age Big Boys, who were until recently scrappy startups, are all dealing in creating, maintaining, enhancing and controlling environments. They now exhibit similar influence and power in the environment they wish to control.

Facebook (FB) today controls a large chunk of a very well developed social networking environment. Today we see videos, pictures, ratings etc using the FB platform. Our networking, messages, connections, social planning is also done there. Already, millions are using FB to buy real and imaginary products, especially through social games. While the race for monetizing that fantastic data produced by FB has already begun (At the core of it, FB sells data and access to people willing to pay for it), new ventures based on FB, like selling credit cards using your profile info, insurance, offering product discounts and even selling Daal/Rice have proliferated. 

So what have they done? Facebook has created a rich environment where others can connect, profile, sell and expose their products/services to prospective customers. The real game changer here is the fact that they know enough details about you to let companies and brands target and approach you far better than previously possible. And since FB controls all the laws, rules, elements of this environment (somewhat) all it has to do, is to take care of it and take a cut from all those products fighting for market share. It is this ability that is being touted, in part, by Morgan Stanley, the lead banker for the IPO.

Google today knows and compiles most of your data online. What you searched for, how you used it, what’s happening on your gmail, what you posted on google+, which cat video was viewed on youtube, which book you searched for etc. And with the recent news of its new ‘simplified’ privacy policy, it is clear that Google is hell bent on tightening its own environment, which until recently was fairly fluid.  

The real game changer for Google is poised to be the Android OS which is currently being given out for free, simply because it promotes better and more precise search for smartphone users. Search still contributes 98% or so, of revenue to Google and it is competing head-on with Apple and now Microsoft.

All of them are fighting for control of the Smartphone OS environment simply because their reach in the market creates pressure on developers to pay them a cut, just to sell apps on those smartphones.

Amazon recently released the Kindle Fire, because it wanted to be part of the online/e-commerce environment through which it will be easier to sell since the purchase experience will be as frictionless as possible. It is notable that most analysts feel that the Kindle is being sold at either cost or lesser. Why? Because it lets Jeff Bezos control e-commerce.

 

Other notable examples like Ebay (Online marketplace and e-Commerce environment control), Windows (Desktop/Smartphone environment control), Xbox with kinect (Gaming platform, online interactive motion control environment), Apple (Hi-end Personal electronics environment control) show that the world of technology is fast moving towards a set of players who will soon control platforms or environments, in which we may be forced to operate in, simply because these platforms are established, provide access and moved in with a grand vision early on.

 

It will be some time before we can see an Indian Startup with the balls, resources and vision to control an entire environment. Only then can we truly say that we have ‘Arrived’.