Snapchat bid triples Facebook’s desperation

November 14, 2013

By Robert Cyran

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Facebook’s Snapchat bid shows triple the desperation. The social network shelled out $1 billion for no-revenue Instagram a little over a year ago. Now it’s said to be dangling as much as $3 billion to lure in a mobile app that sends self-destructing digital images. Facebook’s apparently escalating need to buy off marauders at its moat suggests its defenses may be scalable.

Coming just months before its initial public offering, Facebook had obvious reasons to buy Instagram. Consumers were spending more time on mobile devices, instead of desktop computers. This was listed as a “risk factor” in its IPO prospectus as the social network still hadn’t figured out how to make money on mobile advertising. More importantly, it faced the risk that users might migrate to a rival optimized for smartphone usage.

Buying Instagram gave Mark Zuckerberg’s dorm-room creation 30 million mobile users in a flash. The business has grown fast – it now has well over than 150 million. Facebook is just starting to roll out ads on Instagram, but the purchase looks to be working. If Facebook does buy Snapchat, it would be based on the idea that it can replicate its success with Instagram.

Snapchat has similarly astounding growth. In September, its users were sending 350 million photos a day, up from 200 million in June. Moreover, Snapchat’s young users tend to stick with the service and use it more frequently. Selling ads on a service most famous for its sexting potential might be a challenge, but similar questions have been raised about promotions on social networks from the get-go. And Snapchat isn’t entirely a substitute for Facebook, so this isn’t a zero-sum game. It may be more about grabbing a larger slice of an expanding pie.

Still, there’s a disquieting element about a company spending billions for a simple application it could almost certainly have replicated for next to nothing. Facebook’s acknowledgment that young teens are using its service less on a daily basis may signify the social network is losing its edge among the ranks of new technology adapters. That it is also now willing to shell out $3 billion to snuff out a rival in its infancy brings with it a whiff of desperation.

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It is an indication that the technology-bubble is alive and well. Eliminating competition has always been a basic premise of market economics so the business practices of Facebook are not so much a behavioral anomaly but almost an industry-standard. Even overpaying for a business property that enhances monopoly power is a practice that has made Google, Microsoft and Cisco Systems very successful in the technology sector, and all three have had tremendous corporate success doing it. So (as the author notes), it remains to be seen how this will work out for Facebook in the long term. But the operating margins in gaining and maintaining technology monopolies may be so high, that there is plenty of room for error so that what seems now to be outright desperation in controlling competitive technology threats may turn out to be prescient foresight.

And who would have thought…?

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