Facebook, Instagram and the Singularity
Everybody was surprised by Facebook’s acquisition of Instagram, apparently, even Facebook. Merely one week before Instagram closed a round of funding that valued them at $500 billion (and diluted their shares), so it’s clear that they were not in serious talks by that point.
Why would Mark Zuckerberg drop $1 billion on a company less than two years old with no revenues to speak of and no apparent business model?
There has been an avalanche of pundits giving all sorts of reasons why the deal makes perfect sense: The user base, a foothold in mobile, their technology, development team, etc, yet I haven’t found any of those explanations comelling. I think they bought Instagram because they were scared of the singularity and with good cause.
Only the Paranoid Acquire?
It’s long been known that big acquisitions rarely pan out. Companies usually pay too much and get too little. More often than not, acquisitive CEO’s are driven by ego or just sheer boredom (adrenaline filled sessions with high-priced investment bankers are a great antidote for both).
Usually, there is some strategic rationale and talk of synergies gained from eliminating costs, but the fact remains that great companies are not built through acquisitions and cost savings usually fail to materialize. More often than not, the costs of aligning two disparate cultures negate any savings on overhead.
However, as I pointed out in an earlier post, tech companies have an unusually good record with acquisitions (for instance, they had very small write-downs during the financial crises) and I think a lot of it has to do with the S curve.
While companies in the regular economy focus on established firms, tech companies tend to buy small firms in emerging areas. So established companies at the end of their S-curves where returns are diminishing buy young upstarts in the breakthrough stage.
There are many S-curves going on at once so large tech companies make dozens of acquisitions every year, most of which are incorporated into existing products. Siri, for instance, was not developed by Apple, but was acquired. Other times, small stakes are taken as a hedge (Microsoft, for instance, was an early Facebook investor).
What’s unusual about Facebook’s purchase of Instagram is that Facebook not only made a large investment in a brand they intend to keep separate, but they themselves are only eight years old. So the process has been greatly compressed and I think that is the most interesting aspect of the transaction. In fact, it may be a harbinger of things to come.
The Exponential Digital Laws
I’ve written before about digital laws, the most famous of which is Moore’s law which states that processing efficiency doubles every 18 months. However, exponential laws are the norm rather than the exception in technology. Here’s one that Technology Review published recently, which goes back to the earliest days of computing:
Although the chart specifically shows the trend for computations per kilowatt hour, it’s a fairly good surrogate for what’s going on in technology overall. The advancement over the last decade was roughly 1 billion times that of the 80’s. The next decade will go 1000 times faster than the one we just passed. The rate of acceleration is mind-boggling.
Put another way, if you’re an executive who cut his teeth in the Reagan years, your thinking is a trillion times too slow. If you’re one of those hot-shot digital natives who tweets more than speaks, you’re experience is still in an environment that moved 1000 times slower than the next decade will.
The Singularity is Near
That brings us to Ray Kurzweil’s concept of the singularity, where advancement becomes so fast that it’s almost instantaneous (the concept gets its name from the point of infinite gravity at the center of a black hole).
A lot of Kurzweil’s ideas are pretty far out and many of the predictions he made in his 2005 book, The Singularity Is Near, have proved too optimistic. However, you don’t need to buy his entire theory to see that the basic narrative is undeniable. Things are getting much, much faster. Take a look at this chart:
While the trend isn’t 100% chronological, it’s clear that the S-curve is getting increasingly steeper. Instagram grew to 30 million people in less than two years. If you assume that decision cycles of large companies (and agile ones at that) run about 6 months, then management as generally practiced has a big problem.
What happens when development cycles become shorter than decision cycles?
The New Logic
I think it’s clear that Zuckerberg bought Instagram out of fear. Historically, that has not been a generally accepted way to make decisions. Nevertheless, times are changing and it’s easy to see how spending 1% of your total market value to stave off an existential threat has a certain logic.
However, it is a new kind of logic and certainly not the kind that they’ve traditionally taught in business schools or in statistics courses. The calculated risk of Instagram was reasonably small, but the potential risk was enormous and possibly life threatening for Facebook.
We no longer live in a world of Gaussian statistics, but a broken order of uncertainty and emergence in which inaction is every bit as dangerous as wrong action and traditional decision cycles are no longer viable.