Saturday, 14 April 2012

What can you get for a billion dollars

You have a billion dollars burning a hole in your pocket (Gils, Zeno, and a few others have that problem !). Take your pick. What would you buy ? 800 patents, dating back to the early days of the Internet. Or a red hot new internet rage that everybody is talking about but which has no revenues. Or boring old Yellow Pages. What would you take ?

These are three transactions that actually happened in the last couple of weeks for about $1 bn. 

Microsoft bought the 800 patents from AOL for $1.1 bn. The patent world has become completely crazy for tech companies in the last few years. Everybody is suing everybody else for patent infringement. Some 800 plus patents are given simply for what goes into a mobile phone. Its impossible these days to launch anything without infringing on somebody's patent.The US patent office has gone crazy as I wrote about here - Patents have now become innovation stifling rather than innovation building. Anyway Microsoft believes its better to pay $1.1 bn to acquire them rather than defend later in court.

The crazy deal is Facebook buying Instagram for a $1bn. If you don't know what Instagram is, its  a photo sharing program which allows you to apply filters to your photo (for example to make your photo look like it was taken in 1960) and share it. For a humourous look at it, watch Jon Stewart's show here. This transaction confirms my view that Facebook is a nut case. Instagram has 13 employees and has no way to make any revenues at all, let alone a profit. And here comes Facebook which believes its worth $1bn. Anybody remember dot com mania. Its alive and kicking. Yeah Yeah - I am an old duffer who "doesn't get" the Internet Age.

The third is a boring transaction. Cerebrus , a private equity firm is buying The Yellow Pages from AT&T for a billion. Who even opens the Yellow Pages these days. Doesn't everybody Google everything ? Its a dying product (if not already dead), right ?  Dead wrong. Sure the business is unglamorous. But it has revenues of $3.3 bn and is churning out cash even while in a slow decline. Private Equity folks aren't fools - they can smell money better than any drug sniffing dog. This seems to be the bargain of the lot for the buyer.

All this just confirms my theory on valuations. There is no science to it despite what business schools like you to believe. It just depends on the degree of desperation of either the seller or the buyer.. Sometimes both !

Readers are invited to present their own creative proposals on what they might do with a billion. Gils and Zeno are excused on the grounds that they may have to give away what they might actually do !

16 comments:

  1. Sandhya Sriram14/4/12

    I was wondering why you hadnt written on the facebook instagram acquisition. was wondering, possibly, you got tired with what facebook keeps doing all the time that you let them be :-)

    while i cant comment whether 1 billion is right or wrong, but i feel, it is a great feature that facebook should invest on. with the smart phones and momentary pictures being clicked and shared, this is definitely a great feature on facebook from a user perspective

    Again, i think, yellow pages is not dead. after the initial name and fame of google, as a user, i would prefer a more organized searching like the yellow pages. sometime is frustrating on what all pops up when you google. i would anyday prefer a yellow page online to search the number of chef bakers rather than to google it.

    so while valuation is for the guys who pay for it to decide. for me, as a user i am very happy when things like these happen.

    As for me, while i dont know what i will do with a million dollar, now i have an idea for earning though. i can possibly patent your blogs. what say.

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  2. I think yellow pages is valued for its rich database. Considering the model of justdial in india (i am not sure other nations has such directory) if such single database centre is made available throughout the world would be great benefit. And interesting story is that idea of justdail bron from the yellow pages employee.

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  3. I think you have buried the lede, Ramesh. Your observation that "Patents have now become innovation stifling rather than innovation building" deserves to be the main point here.

    Patents and copyrights are absolutely needed, yes, to provide the economic incentive to the inventor or the creator. But, somewhere along the road, the right to that innovative way of thinking ought to belong in the common pool of knowledge in order to foster even newer ways of thinking.

    A long time ago, during the Clinton-era technology boom times, I was drawn to the arguments that Lawrence Lessig made about these. I have intentionally tracked down one of his essays from that time period, which seems so, so, long ago now.
    Lessig opens his essay with the following lines that will make most people want to sit up and think again:
    "A patent is a form of regulation. It is a government-granted monopoly - an exclusive right backed by the power of the state. This monopoly is granted by a bureaucrat - a well-meaning, hardworking bureaucrat no doubt, but a bureaucrat nonetheless. This government employee decides whether an idea is novel, useful and nonobvious. If it is, the government guarantees the inventor an exclusive right to the idea for 20 years."

    A practical way in which we can think about this is this: in the rapidly changing technological world, what if a eight-year old patent is stifling the 22-year old in India who senses a fantastic opportunity?

    So, there ....

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  4. 1)I strongly believe bubble is in waiting. I also believe Facebook is hyped for nothing. [I will also give it to FB that it does have the stickiness factor] having said that here is some one who justifies the purchase ;)

    http://www.wired.com/epicenter/2012/04/opinion-baio-instagram-trend/

    If only I had 1 billion and i was at FB i would have spent it on making their mobile app on par with desktop experience

    If only i was at MS would have tried out what could be done to get Nokia/MS as the third player to wedge between Android and iOS or better wat to do to be the number 1

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  5. http://nymag.com/daily/intel/2012/04/facebook-and-instagram-when-your-favorite-app-sells-out.html

    Another way of looking at the acquisition

    as well as different application of Instagram [Don't shoot the messenger]
    http://www.androidpit.com/en/android/blog/404342/boobstagram

    again, i really do not think Instagram was that worth it or even FB for that matter

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  6. I remember scratching my head a little when I heard about the Instagram acquisition - especially since I heard Kevin Systrom speak in San Francisco a few weeks ago in a an up-close and personal setting that I was pretty lucky to get in to at no cost (I was a volunteer). I can still remember Kevin shaking head saying he had no desire to sell the company and that was he was not prepping it up for a sale at all. And yet, weeks later, Instagram is off the shelf for a cool billion. My Entrepreneurial finance professor based the s**t out of that valuation in our class on Tuesday. That being said, I did stumble on to an explanation for that valuation. I am curious to see what the rest of your commenters think about it but here goes:

    a. If you think in terms of a user base of 35 million that Instagram has (and that Facebook is getting as part of the package deal), the acquisition cost of each customer might not be high ASSUMING you can monetize that user base.

    b. I don't think Facebook is looking to simply slap Instagram into their eco-system "as is". My guess is they are going to use Instagram's assets for a mobile strategy that they haven't quite nailed yet. I mean, Instagram did figure out mobile photo sharing in a way that facebook didn't.

    c. The other explanation is that facebook was scared shit of the competitive challenge that Instagram could pose moving forward in the mobile space and acquisition was a defensive strategy - and they figured 1% of their own valuation was a fair price.


    I realize I could be full of crap here with this explanation but I am curious to know what the rest of the folks here think.

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  7. And on the topic of patents (I feel compelled to say something here), it is totally a defensive strategy but it also gives legitimacy while pitching to VCs - especially if they hurl comfortable questions relating to sustainable competitive advantage.

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  8. @Sandhya - I am much intrigued as to why you want to find our baker chefs ??? And really, you think Instagram is worth $1bn ??

    @Venkat - Yes, Just Dial is a great option expecially in India. And what you mention about Yellow Pages is hy Cerebrus is investing in it.

    @Sriram - Love your perspective on patents. Its a tough one ; in areas like medical research where each formulation costs billions to develop, without some rigorous patenting, no drugs will ever be discovered. I thinks its all about balance. Yes; patents are crucial, but the US Patent office has gone overboard with patenting everything.

    @Zeno - Oh there will always be pundits justifying anything. My pundityr is that this is the most stupid and outrageous waste of money.

    @Pranav - All three justifications have been used to explain this move, but the problem is none of then equate to $1bn. If Facebook has paid $10m for this, that's a different story. But nobody can justify a prce tag of $1bn. That's sheer nonsense any which way you look at it.

    Btw, I thought you would rise to the bait on patents vigorously !!

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  9. Sandhya Sriram15/4/12

    well Ramesh, i dont believe or bother about what instagram is worth.

    as a user, i would like that feature on facebook and whether a stinking rich zuckerberg pays a million or billion is frankly his problem.

    what do you say :-)

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  10. We should not worry too much about FB. I think mark zuckerberg is trying to tell us that he is willing to pay ridiculous prices as long as it is with his cheap currency, the overvalued FB stock. Now let me go dream about how I will spend a billion dollars :)

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  11. I have some "street cred" in being able to respond to this email, as I run a struggling company that is subject to the whims of acquirers and investors on what my company is actually worth.

    First off - power to these kids who got away with a billion dollars of Mark "Sucker"berg's money. I wish I was in the same happy position. There is much that they can do with the money - after the obligatory drinking and chasing skirt (male or female) I hope these boys have a good life ahead of them. I am not going to weep about the iniquities of the system.

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  12. I am heading straight back to India to open a chain of rural schools (closer to my kendriya vidyalaya model). A billion dollars is more than what I need but thinking about all the administrative crap I can cut down on and slightly better infrastructure than what I have thought of. Boy you got me dreaming there!

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  13. well, if I had a billion dollars, will buy into companies that are into food (not the conventional types but the bio tech variety which produces high yield stuff) and water. The next frontier after oil is gonna be water when the world starts running out of it soon. (Hopefully we will not have uncle sam coming over to my part of the world -kiwiland- we have a lot of water but we are just a pimple in the bottom of the earth for Unc.Sam to even bother about us!)

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  14. Instagram acquisition - not really worth it. They could easily have developed their mobile app to enable that capability.

    If I had a billion dollars, I would use them for two causes that I am very passionate about: 1) care of the elderly (especially those whose children have deserted them, and have illnesses. It does not matter how they got to the stage where they are suffering, they need grace at that age. Period. 2) Opening play and activity (sports included) oriented pre-schools for children. It's sad how all the schools I have been touring for the kiddo are so much focused on curriculum. When would she play? We start conditioning our left brains way too soon, and leave behind the rich potential that the right brain has to offer.

    Hopefully my efforts will start a revolution, and we will collectively bring a change to these two causes.

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  15. This comment has been removed by the author.

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  16. @J - Dream on ... Dream on .....

    @Ravi - Really ??

    @Deepa - Actually you need more than a billion dollars for it and Ramamritham (read CBSE and AICTE, will block you every inch of the way)

    @Kiwi - Absolutely right - next frontier will be water. But I don't think anybody is willing to pay for it, so....... the billion will go away very fast.

    @Shachi - Facebook should have hired you instead. You would have come for half a billion , wouldn't you ?? And developed the app ??

    Noble causes as I very much expected from you.

    ReplyDelete

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