30/04/2012

By David Terrar, CEO Of D2C Limited, Co-founder Of Cloud Advocates

A few weeks ago Facebook's acquisition of photo sharing site Instagram for $1Bn hit the news amid a flurry of speculation over whether we were in another technology bubble like the late 90s.

It does highlight the difficulty of valuing companies and picking technology winners in the world of cloud computing, web apps, mobile devices and social networks that we live in today. It set me thinking about how you value companies, how you create (or kill) brands, and how this fashionable topic of "big data" is really important. First, a few facts about Instagram. At the time of purchase the company had been in operation for 551 days, employed 13 people and had been living on $7m of investment funds.

They had zero revenue (or profit), with no business model on the horizon to achieve any. Facebook could have created equivalent functionality for photo sharing from mobile phones very easily themselves - the "product/service" isn't the point, it's the network. Instagram had created a very nice user experience for taking photos from your iPhone (with an Android app just announced), applying some effects and then hosting and sharing them on their social network whilst broadcasting them on Twitter, Facebook or elsewhere. But the key thing Facebook were buying in to was that in only 18 months Instagram had built up a user base of over 30 million users uploading photos at a rate of 5 million a day. That's some momentum, and that's what Facebook is buying.

This is where I have to admit that I struggle a little. I'm used to a more conventional products and services business with a valuation based on asset value, sales, profit or the potential of profit. Those rules still hold true, and that's why Apple is the world's most valuable company. However there are new rules for the networked, globalised world of Internet technologies and social networks. Is Instagram worth $1Bn? Time will tell.

YouTube was acquired by Google back in 2006 for $1.6 Bn and it's thriving. Microsoft bought Skype last year for $8.5Bn - I meet more people using it, not less. On the other hand New Corporation bought MySpace in 2005 for $580m and then sold it last year for £35m - there are losers as well as winners. Does anyone remember Friendster or Xanga? Facebook came after all these three and became a winner.

Ironically, Instagram has grown from start-up to a billion dollar valuation during the period that Kodak, the company that put photography in to the hands of the consumer back in 1888, has hit the buffers and is struggling with bankruptcy after over 130 years of history - Instagram's moment versus the Kodak moment. Kodak's demise is all to do with a well loved brand failing to keep to its core purpose or to evolve with new technology and ways of working. They've lost their tribe, while Instagram is just building theirs.

Around the time of Instgram's acquisition I saw Larry Dignan's piece on Splunk's strong IPO. Their valuation and approach was a little easier to get my head around as it's a little more like the conventional SaaS offerings I'm used to. The company does business intelligence solutions over big data. Splunk aims to take machine data from corporate networks and turn it into real-time analytics for a variety of applications including online marketing, scientific applications and tracking RFID tags.

They have 3,700 customers in 75 countries including names like Harvard University and Bank of America. They have a series of 350 apps that sit on top of the data developed by themselves and an ecosystem of partners. Although they aren't making profits yet, you look at Larry's explanation and can see the revenue growth, the quality of the customer set and get a feel for the potential.

They have plenty of competition, but their offering targets the key opportunity area for innovative thinking using the huge amounts of data collected by cloud offerings and web apps. They offered 13.5 million shares at $17 and the price ended at $34 on the first day of trading. Impressive!

More and more web apps and cloud companies are looking to use of the large quantities of data they are collecting from their customer communities. MailChimp have something called the Email Genome Project. With it they’re constantly analyzing millions of email list, and hundreds of millions of email addresses, to uncover stories and trends that are hidden in the data. Their research aims to help create better experiences for both their senders and subscribers.

Another example is Apple's Siri voice recognition on the iPhone 4S. It matches your speech pattern to a library of voice patterns to help it understand what you are saying, but more than that, it's collecting data from every user as it goes, all stored in Apple's Maiden, North Carolina cloud data centre. It will steadily get better and better, and there are a host of ways Apple will be able to use that big data in the future.

All this means that you can't look at valuing Instagram as just a product. You have to realise that the community of users and their data has become an integral part of the product. We've always thought of customers as "stakeholders" in the business, but now when you are valuing the company, the customer community and the data it's creating are assets on the "balance sheet" too.

David Terrar is a consultant and software developer who specialises in the use of Cloud applications and social media in business. He is a co founder of Cloud Advocates, an association of consultants who aim to demystify the Cloud and provide pragmatic help and advice for businesses, organizations and accounting practices. To find out more, visit http://cloudadvocates.com/


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