It’s not everyday that the tech industry sees two of its giants fork over $1 billion, especially for things that (at least at this point) have so little impact on the everyday technology consumer.

But such is life in the wild world of tech where an aging company like AOL can sell a patent portfolio to Microsoft and an emerging upstart like Instagram can double its valuation almost overnight (without any real business model behind it).

Acquisitions are exciting, the tech industry’s equivalent of the Super Bowl. That’s especially the case when the deals hit the magic number of $1 billion, sending the tech blogosphere into an uncontrollable tizzy.

But the craziness of the day — highlighted by the disparate nature of the two deals — shouldn’t necessarily be greeted with cheers.

In the case of Microsoft’s patent buy, it’s unclear exactly what the software giant intends to do with the intellectual property.

But the competitive bidding process and high price tag once again raises concerns about the litigious nature — the ugly underbelly if you will — of the industry. Using patents as defensive or offensive weapons may help employ a few extra lawyers and drive some revenue (as it does in Microsoft’s Android-related licensing deals), but it’s unlikely to spur the type of innovation that technology companies once prided themselves on.

As GeekWire reader Christopher Budd commented today:

“I’m all in favor of intellectual property, but I admit I’m distressed at how tech seems to be turning away, generally, from innovation and competition and towards acquisition and litigation,” Budd wrote.

Nicely said.

Facebook’s $1 billion purchase of Instagram, meanwhile raises an entirely different set of issues. Sure, some people love the photo sharing service. And with roughly 30 million iPhone users, it is an emerging force with GigaOm’s Om Malik suggesting that the company may have even sold too early.

But the wild fluctuation in valuation, mushrooming from a reported $500 million last week to $1 billion today is simply insane. And while it may be good for Instagram’s venture backers and its 13 employees, it’s hard to really get your head around the economics of the deal. In the course of human history, has a 13 person company ever been worth $1 billion?

Or, as another GeekWire reader, noted:

“On what strange planet is Instagram worth $1 billion? Good to see that nothing was learned from the dotcom fiasco and paying too much for today’s flavor of the week is alive and well.”

What do you think? Are these the best of times or the worst of times, the age of wisdom or the age foolishness for the tech industry?

FOLLOW-UPThe battle to train a market: Instagram is what Facebook has been telling you guys to do for like a year, okay?

 

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Comments

  • Guest

    Seems like a strawman argument. MS is making major investments in both R&D and patents, as is Apple (only much more successfully). So it’s not an either/or situation. Also, isn’t FB buying Instagram really about trying to thwart competition and innovation? Why else would FB pay that kind of valuation? The logical answer is they perceived a growing threat from Instagram, which in some ways was creating a competing social network.

  • Joe M.

    Remember when Microsoft was shredded because their investment in Facebook gave an aburd valuation at the time?

    • Guest

      I do remember that, Joe. My friend Henry called Steve Ballmer an “illiterate, chimp-like buffoon” among other less charitable appellations at the time. Steve’s crime? Valuing Facebook at $10 billion.

      That tiny stake, based on Facebook’s IPO value? $2.45 billion.

      Thank you.

      There’s a reason why men like Henry whinge on tech-blog comment sections and why men like Steve run the economy, Joe.

      • Guest

        Even a blind squirrel occasionally finds a nut.

        • Guest

          A nut, or 2.45 billion nuts?

          • Guest

            A nut. Two more like that and he can almost pay back what he blew on aQuantive.

          • Guest

            How many nuts did he blow over aQuantive?

          • Guest

            Around 6 times what he blew on Danger/Kin or half of what he’ll likely lose on Skype before that’s all said and done.

            $6 bill, not counting closing costs and integration. Minus the $500 mill they salvaged by subsequently selling off Razorfish.

          • Guest

            Ouch! That’s a lot of nuts to blow. I hope he has the stamina to have another go.

          • Guest

            If there’s one thing you can count on Steve to do it’s to not learn from past mistakes and just continue repeating them.

    • Guest

      Yes. But it was a lot easier to see where FB might one day make a lot of money versus Instagram. Also, IIRC, MS didn’t really make the investment at that valuation level. They did an advertising deal that had, in part, an ownership component, and then allowed FB to promote it as a $10B valuation because at that time FB was having trouble securing other investors. In other words, it’s a rare example of an external MS investment actually making money, and the fact that it did probably surprised nobody more than Ballmer.

  • http://www.christopherbudd.com Christopher Budd

    Nice article and good thoughts.

    I understand the poster’s point about R&D investments but I still stand by my feeling that in the past couple of years we’ve seen an increase in a series of legal ground wars around patents. To be clear it’s not just Microsoft by any means. All the big tech companies are doing it.

    It’s their right, but it has an impact. Innovation and development are hampered when the legal overhead gets too much.

    • Guest

      When companies are prepared to license their patents on reasonable terms (e.g. MS), as opposed to unreasonable ones (i.e. MMI), or not at all (i.e. Apple), then it’s unclear to me what the barrier to innovation is.

      • http://www.christopherbudd.com Christopher Budd

        It’s not so much a barrier as a tax.

        A greater focus on legal matters translates into more review, approvals, bureaucracy….all the things that are contrary to nimble innovation.

        It shows itself in matters as simple as people not putting things in writing (so they can’t be discovered) and casts a large pall over everything.
        Worst of all, though, it instills a culture of “may I” and one that’s very risk averse.

      • Pete Austin

        Three barriers for you: (1) FOSS projects cannot license such patents and must divert effort away from innovating, into working around them (2) Startups never happen, because the would-be founders are deterred from innovating, out of fear of the known high costs of even getting legal advice if a patent claim is made (3) Money is diverted from successful, innovative companies like Facebook, to failing companies like Yahoo or AOL.

        • Guest

          1) Stupid for FOSS devotees to impose that business restriction on themselves. 2) Startups never happen? Oh sorry, you’re actually serious. 3) Or people who are abusing the innovations of others are disssauded from doing so, leaving companies like Apple free to reap the full benefits of their patented ideas.

    • symbolset

      The purpose of buying patents to litigate with is to prevent your opposition from making (and delivering) progress.  It’s the opposite of innovation.  Microsoft should be ashamed.

      • Guest

        Ah, one of hardcore MS trolls comes out of the woodwork. So since Apple, Google, FB and just about every other large company is buying patents they’re all trying to prevent progress? Is that your absurd contention?

        • symbolset

          No, just Microsoft and their friends.  The others are only buying and using the patents defensively because they’re forced into this game against their will and it’s the only way to stay alive.

          It’s a sick game.  Microsoft should be ashamed.

  • http://twitter.com/aaBowlin Austin Bowlin

    I don’t think there is a necessary correlation between the number of employees Instagram has and it’s fair value. Although at first glance $1billion does seem a bit absurd, FB isn’t paying those big of dollars for the employees/team, they also are not paying for a proven revenue model – what they’re paying a billion for is 30 million users who are significantly more active in regards to photo-sharing than the average FB user. We all know photos account for well north of 50% of the time spent on FB. A purchase of 30 million users who generate 5x? 10x? 20x the content of the standard FB user all of a sudden makes this seem like a bargain purchase in some lights. Instead everyone appears to be caught up on the sticker price. I think this was a strong move on FB’s part and look forward to seeing how they incorporate Instragram in the months to come.

    • Guest

      It probably wasn’t lost on FB that Instagram’s founder was ex-Google and that if Big G had aquired them and integrated this into Android, they might have finally been a threat to FB in social.

      • Guest

        i think that’s the key.  most likely there was a bidding war going on, and FB won it

  • http://blog.CascadeSoft.net @CascadeRam

    Yes, it is interesting that a company with no revenues was acquired for $1B.

    However, setting aside the question of whether the company is really “without any real business model behind it” the acquisition demonstrates another key point about the industry (mobile industry to be specific)

    Instagram launched an an iOS-only app and stayed that way until a few days ago (when they diversified to support the second-most important mobile platform – Android)

    Instagram’s iOS-only strategy and their remarkable success is another demonstration of how (from a developer perspective) iOS is way ahead of the second and third important mobile platforms.

  • guest

    There are two issues going on here: (1) the aquisition, (2) the price.  As this post points out, the aquisition makes sense on many levels.  It’s the price that has got people scratching their heads.  A billion?  Really.  Tells me the FB wanted it bad and didn’t want to lose out to some other bidder.

  • reneemjones

    Name one important invention where it can be shown that “intellectual property” was a prerequisite for its creation.

    • symbolset

       Can I count Groklaw as an invention?

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