Instagram: Instigating Instability

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I can see it now: the camera winds slowly up a trendy Santa Barbara street before focusing on a slightly aged Jesse Eisenberg as he sips a latte in a locally-owned coffee shop. He adjusts his thick-rimmed, lens-less glasses and cocks his fedora at an appropriately haphazard angle, gazing expectantly at the door. In walks Instagram CEO Kevin Systrom — played perhaps by Joseph Gordon-Levitt — and the dramatic theme music begins to play. Bathed in the pleasant yellow glow of Instagram’s “Earlybird” filter, negotiations begin. Once again, we witness Internet history in the making.

OK, so maybe Facebook’s $1-billion purchase of the photo sharing application Instagram isn’t quite intriguing enough to inspire “The Social Network 2,” and maybe the acquisition doesn’t indicate Facebook CEO Mark Zuckerberg’s transformation into a sepia-filtering hipster. Instead, it seems that the truth behind the massive purchase is much more pragmatic and worrisome.

The staggering figure Facebook paid for Instagram, a startup with no revenue to speak of and a total of 13 employees, may indicate an impending tech bubble burst. When a commodity’s popularity — its “cool factor,” if you will — causes consumers to drive its price drastically above any realistic valuation, a crash is inevitable.

Facebook itself provides additional reason for concern over a bubble burst. As the company prepares to go public, The New York Times reports that it will be valued around $100 billion, a number most analysts find exorbitant. Few would argue against the brilliance of Facebook’s concept and business plan, but the highest estimates of its 2011 revenue hover around $4 billion, according to Bloomberg. This level of overvaluation is clearly unsustainable and, once the company’s finances go public, threatens to scare away investors.

The billion-dollar Instagram purchase also points to a monopolistic mindset possibly taking hold at Facebook, whereby the company aims to buy up all potential competitors before they can do any lasting damage. Of course, Facebook has the innovators and resources to produce an application similar to Instagram, but there is little reason to innovate when you can simply purchase.

Of course, the market bubble in which social networking sites and applications are currently encapsulated enables this form of financial bullying. Facebook users should not be surprised to see new options for photo filters such as the ultra-saturated “Lomo-fi” or nostalgic “1977,” but once Instagram’s “cool” wears off, Facebook will be forced to acquire the next networking fad or lose some of its own popularity.

Perhaps the most troublesome aspect of Facebook’s financial domination is its discouragement of competition. Photo startups such as Instagram can hope to be purchased by Facebook because they offer a valuable addition to its services, but alternative social networking sites such as Google+ or Wavii seem unable to step outside its looming shadow. Whether they are impeded by a lack of funds or a lack of name recognition, competitors stand little chance against Facebook, at least until this latest tech bubble bursts. It is difficult to estimate Facebook’s staying power — it has certainly defied the bleak examples set by its forebears Friendster and Myspace — but a dramatic drop in investor confidence could set the stage for competitors to challenge the networking behemoth.

Until Facebook goes public and makes it plans regarding Instagram explicit, observers can do little but speculate. While this particular purchase may not motivate a film sequel, the fall of Facebook, whether dramatic or gradual, is sure to captivate and inspire generations of tech innovators to come.

Oliver is an English and sociology freshman.