Explaining Southern California's economy

Has Yahoo finally decided to give up on tech and become a media company?

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Yahoo!'s Santa Monica location.

I think Yahoo is unique among current companies for several reasons. First, it's got a foot firmly planted in both Silicon Valley and Southern California — two places with business models that just can't seem to get along (SOPA? PIPA? Hollywood?). And it's been this way for a while, going back to the days when Terry Semel was CEO and Yahoo was looking a lot more like a media company than a tech company. (Yahoo also has an office in New York, which adds yet another wrinkle, as the Big Apple is the capital of media.)

Second, Yahoo still has a huge number of users, some 700 million, but it can't seem to grow its revenue. This has caused great turmoil at the company and no end of speculation about its future. But why does it have so many users? Because it's one of two big holdovers from the Web 1.0 era, before the dotcom crash. The other is AOL. (Microsoft and Amazon are a different story, by the way.) Both companies occupy a lot of Internet mindspace. But no one thinks they have the same potential as Facebook (which, interesting, Yahoo is now suing, and Facebook is suing back).

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Facebook buys Instagram for a cool billion

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

Facebook just announced that it's acquiring Instagram, the photo filtering and sharing app-maker, for — wait for it — $1 billion! The deal is in cash and shares, although given that Facebook doesn't actually have public shares yet, we'll have to assume that the stock part is coming from Facebook equity that now trades on private markets. Safe to assume that this equity will convert to Facebook stock when the company launches its much anticipated IPO later this year.

Instagram is only about two years old, but its users are sending upwards of 5 million photos a day to sites like Facebook and Twitter. A $1 billion valuation implies revenues of 200 million (at a conservative five-times multiple), which is just off the charts for a company so young. Particularly since Instagram is generating profits of exactly zero.

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