Google buys Waze. Yahoo buys Tumblr. Facebook buys Instagram.
Three recent social-media deals highlight a strange phenomenon: the $1 billion app that makes no money. It seems ridiculous at face value--how can cat GIFs and photo filters be worth that much?--but I took a look at tech's recent history to put these deals into context. Some of these gems might surprise you.
1999: Yahoo buys GeoCities for $3.6 billion
Yeah, you read that right. $3.6 billion. Tumblr seems like a steal in comparison. At the time, GeoCities was the number three most-visited website on the Internet, just behind AOL and Yahoo. In fact, Yahoo acquired GeoCities because of its popularity as a personal publishing platform, back when personal websites (or blogs, as we now call them) were your Internet calling card. After the dot-com bubble burst and free (or cheap) Web hosting became de rigueur, GeoCities quickly slid downhill. Yahoo at last ended the site's suffering in 2009.
Yahoo spent a ton of money in 1999, as the company also acquired streaming-media site Broadcast.com for $5.7 billion. It's being decidedly more conservative under Marissa Mayer's leadership.
2006: eBay buys Skype for $2.5 billion
Meg Whitman, eBay's then-CEO, dreamed that the auction site's buyers and sellers would turn away from email and instead chat over Skype. That never happened. The company took a lot of heat for allowing Skype to languish, but the video-calling platform managed to fare just fine. Microsoft snagged Skype for $8.5 billion in 2011, and today it's still one of the most popular services around.
2006: Google buys YouTube for $1.6 billion
In retrospect, the most surprising aspect of the Google-YouTube deal is how little Google paid for the online video company compared with other big acquisitions of the same period (see: eBay-Skype). At the time, YouTube's $1.6 billion price tag seemed steep. The site was far from a money-making enterprise, and critics doubted its long-term potential.
But Google stayed the course. Instead of folding YouTube into Google, the search behemoth let the fledgling online video site retain its quirky community and grow into the top online video platform. The popularity of online video shows no signs of diminishing: According to comScore, 182 million Americans watched some 41 billion videos online last month. YouTube ranks toward the top of the Internet's most-visited sites. Now that $1.6 billion seems almost like a bargain.
2008: AOL buys Bebo for $850 million
AOL's $850 million acquisition of social network Bebo in 2008 seemed like pocket change for the media company, which in 2000 had spent $164 billion to acquire Time Warner. But the Bebo deal turned out to be a disaster. (The Time Warner deal was also a catastrophe.)
Bebo, once an incredibly popular site that competed with MySpace, proved that not every early social network could scale for the long haul. Bebo couldn't begin to compare to Facebook or Twitter as the years passed. In 2010, AOL dumped the site in a $10 million sale. Bebo filed for bankruptcy last month.
The deal that never was: Yahoo's $1 billion bid for Facebook
In 2006, Facebook hadn't yet cracked 10 million users. It had just opened the doors to regular folks after building networks of college students. And it was fending off Microsoft and Viacom, each of which wanted to buy the site for some $750 million.
Yahoo, desperate to gain access to the community of 18- to 24-year-olds flocking to Facebook at the time (sound familiar?), reportedly made two overtures for the social network in 2006. But the social networks that sold out early (MySpace, Bebo) struggled to grow within corporate conglomerates. CEO Mark Zuckerberg decided to go it alone.
Now Facebook is one of the top tech companies in the world, competing with Yahoo to acquire other startups (see: Tumblr). Though each of the major players, including Facebook, Google, Microsoft, and Yahoo, began as a specialized service--social network, search engine, software provider, and Web portal--they are gradually overlapping with forays into maps, photo-sharing, and more.
That's where the $1 billion app comes into play. Sharing platforms, location-based data collections, and search tools are key to growing a well-rounded tech company (and getting those sweet, sweet ad dollars). If an app such as Waze or Instagram can deliver tens of millions of users along with their tech innovations, however small they might be, suddenly $1 billion becomes the market price--if for no other reason than Facebook, Google, and Yahoo don't want each other to have that app. Whether Waze or any of the other $1 billion apps proves to be a YouTube-type bargain or a Bebo-type bust remains to be seen.