When an 18 month-old photo-sharing company consisting of about a dozen guys and no real revenues is purchased for $1 billion dollars, do we need any clearer reminder of how batshit crazy things are?
Those who continue to inflate the tech bubble will be quick to remind us all of how they've learned from the past. That this time, it's simply different. They do have a point. Silicon Valley (and Alley) have matured. Startups these days are focused, driven, and efficient, creating products that people actually use. In a period of less than a year after its launch, Instagram was used by 5 million users, who by August of 2011 had uploaded 150 million photos.
But even with these impressive results, it's impossible to ignore the fact that many of the fundamental economic factors that led the first bubble remain, as Reuters columnist James Saft recently pointed out.
Twice since 1997 the Federal Reserve has eased policy in the wake of disruptions to financial markets and twice speculative bubbles have grown up in the aftermath. It is looking increasingly as if social media technology shares are the third in the series. In 1998, following on from the Asian financial crisis, Long-Term Capital Management came near to failure and required a Fed-orchestrated bailout. While no Fed money was used in the rescue it was followed up shortly with a cut in interest rates intended in part to calm the waters. That sent a clear signal to the market: the Fed has your back. It should come as no surprise that subsidizing speculation gave rise to more speculation, but this time on a larger scale. The Internet bubble rose rapidly and burst just as rapidly, followed by a sustained campaign by the Fed to lower interest rates. The Fed, led by Alan Greenspan, had already halved rates to 3 percent by the time of the September 11, 2001 attacks and it carried on, ultimately taking them to just 1 percent. That set the stage for the housing bubble, which, fanned by low rates, duly grew and hugely exceeded in size the manias which came before it. When housing burst the global financial system nearly failed and Bernanke’s Fed took rates to virtually zero before launching a multi-pronged quantitative easing campaign which is still ongoing.
In regular terms, quantitative easing is a fancy way of saying "print motherfucker, print," essentially flooding the markets with cash that’s cheap to borrow. And with rates as low as they are, those in the money need somewhere to park their green. Many have looked to the equities market, which is why we're seeing the likes of Apple flirt with a market cap of $1 trillion. But there are only so many mature tech companies worth betting on. Others of course, have turned to tech startups, perhaps inspired by the unbridled enthusiasm of the likes of Yuri Miller's Digital Sky Technologies with their now choice-looking investments in Facebook, Zynga, and Groupon. That Aaron Sorkin movie probably didn't help.
In some ways, it's capitalism at its finest: the reallocation of capital into more efficient and relevant assets. That more money is flowing into technology is not necessarily a bad thing — if we were able to look at things objectively. The problem with bubbles is that the ups and downs create an emotionally-charged frenzy that prevents us from thinking clearly, the result being unrealistic expectations.
Some (like Obama) have long hailed tech as a savior of the faltering economy (he even started a clean tech ‘vc’ at the Dept. of Energy). Meanwhile, computers may very well be the quintessential mass murderer of jobs, despite what Apple's PR guys might have you believe. The endgame then is filled with disappointment, anger and backlash.
For now, when you put it into perspective, Facebook’s giant purchase of Instagram doesn't look too bad after all. It’s more coherent babble in the mad house. As Saft writes, “Facebook is making rational decisions within a context which is fundamentally irrational. Facebook has been awarded a valuation of its own shares and business which is likely hugely in excess of their actual promise. That valuation is predicated, in large part, on their dominant position within social media. They are being paid because they have the best network.”
For Facebook, which launches its IPO on May 17, the deal just makes sense. They have cash so it doesn't matter and no longer need they worry about Instagram. In a way, it signals the true end of the disruptive phase of this bubble. Those in ascension — the Facebooks, Apples, and Twitters — are consolidating power much like Microsoft and later Google did before them. So for those watching, this time may be different, but that doesn’t mean a bubble isn’t about to pop. No fancy hipstamatic filter will be able to pretty that up.