The Billion Dollar Easter Bonanza

So we wandered back into the office this morning after the usual Easter break, and conversation wasn’t long in turning to the two Billion Dollar deals struck over the weekend. Most of you will already be aware that Facebook acquired Instagram yesterday for US$1bn in cash and stock, but the fact that Microsoft also bought a slate of patents from AOL for the same price since last we spoke my be coming of news to many. But why? And what exactly does it all mean?

First up, the Instagram deal… To many observers, it looks slightly skewed that a company less than two years old, and with a mere 12 employees could be valued so highly, so let’s take a look at this. It’s probably useful to have a think about how Facebook actually generates revenue. I’m sure we’re all fairly aware of how facebook make most of their money, namely by an advertising model that allows people speak directly to interested customers based on friends’ interactions, known likes, and stated interests. Nothing new there, but just in case, here it is, straight from the horse’s mouth.

So why Instagram? Simple enough, really. Instagram is an image-based social network, with over 30m registered iOS users up to last week, when they went live with their Android app, and attracted another 1m in a single day. That’s a lot of people. People who make pretty images, and like to share them with the world. But here’s where the business end really kicks in…

It’s long been accepted that imagery in advertising can be used to influence consumers, and not necessarily for the good (size zero, anyone?). This is because they portray a perceived notion of the ideal. Often it’s unrealistically thin, glamourous women, and tall, handsome wealthy men, all wandering around in some sort of sportscar and beach filled utopia.

If we accept that this is not a realistic ideal, but also that it doesn’t seem to be dropping off the advertising imagery radar, it’s not too much of a stretch to believe that those ideals do seem to strike a chord with the average Joe / Jane Soap. These images do, in fact, influence behaviour.

But what if there was a more accurate way in which to utilize imagery in order to influence sales? What if there was a way to garner a little understanding of the kind of imagery people genuinely respond to? What if, and this is the beauty of the whole thing, the end user actually went out there and generated that image content for you?

Pub talk would have us believe that over half the photos ever taken have been captured in the last 12 months. No great evidential back-up, but it does sound plausible. Everyone who’s anyone has a phone with a camera built-in, before the significant proportion who do actually go out and buy a camera as well actually do it. Instagram (and a plethora of other similar networks) allows people to share the images capture in their everyday lives, tag them, like them, show them to friends, interact with them, and describe them in a manner that allows the world to see them.

In short, there’s a hell of a lot of information about the photographer, perhaps unintentionally, being sent out there with each image posted. There’s even a hell of a lot of information about their friends to be gleaned. Instagram even do a daily round-up of their ‘favourite’ images of the day, for all to see. This, quite simply, is the savvy marketer’s dream scenario. And THAT folks, is why Instagram, with a tiny number of employees and barely out of nappies, is suddenly worth a billion dollars. Oh, and you can make your photos look like old polaroids too, and everybody likes that. Apparently more than they ever liked using polaroid cameras unfortunately…

So if we’ve established that this is the sort of monetary scales social media operates on in this day and age, what’s the story with AOL and Microsoft? On the surface, two companies rapidly being consigned to the history books doing a billion dollar deal makes about as much sense as the White Star Line trying to buy the Spanish Inquisition.

Internet legend and folklore would have it that AOL invented online communication way back in a thing called the 80s, and on the Atari 2600. Interestingly, the original idea was to sell music on demand, but this was rejected as the stuff of fantasy. Acquired, and subsequently spun out again as a single entity by Time Warner, the company has undeniably been at the forefront of more than its fair share of technological and communicative advances ever since. To the point that they’ve built up a slate of over 800 patents. And that’s the key.

We live in the age of the patent war, where behemoths like Microsoft, Apple, HTC, Samsung and Google fight amongst themselves for digital supremacy. The Battlefields are commercial courts up and down the globe, and the prize is market share. Steve Lohr of The New York Times had an interesting take on the phenomenon yesterday.

Patents on technologies are the most effective weapons in this war, and AOL have been around since day one. Take these technologies, that were originally developed for desktop computing, but are increasingly being deployed in the growth market of smartphone and tablet hardware, and if you can secure exclusive rights to any of them, you get a distinct advantage out there. Either you can stop other companies using the same technologies, or you can charge them exorbitant licensing fees that make their own production unfeasible. Failing that, you can always hold out for the lucrative out-of-court settlement or the massive judicial payday.

Now this kind of trolling might seem unpleasant, but we are living in the age of fast-moving mobile communications (Analysis puts smartphone sales at 158m in Q4 last year alone), via portable devices using tech based on a lot of these patents. The stakes are amazingly high, and whilst patent wars are nothing new, the rate at which this one is unfolding is mind-boggling.

The one silver lining for the end user would appear to be that the market, whilst not over-crowded, does have enough savvy players to ensure that nobody secures a monopoly, but the question still remains, if these companies ever decide to start pooling resources, or forming factions (evidence is already there…), how long before we start suffering the consequences of an oligopolistic market? Imagine what’s happening with the price of petrol, only far worse, and with no access to twitter.

Either way, that’s the sort of investment Microsoft have made this weekend, and the business sense behind it. I’m kind of reminded of that Simpsons episode where Bill Gates ‘buys Homer out’, but it’s potentially not going to be anywhere near as funny in the near future… Big changes are coming for the average user in the street. They mightn’t actually be all that visible, but they will be there, and there’ll be plenty more food for thought before the ink dries on either of these contracts.