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Facebook's Instagram deal ignites fears of new tech bubble

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Facebook's decision to splash out $1bn (£629m) on Instagram, a company with no revenue streams and a small team of staff, has raised fears of a new bubble inflating over Silicon Valley.

Instagram, which launched on Apple's iOS in 2010 as a way for people to add filters to their photos and then share them with other users, has 30m users worldwide.

More than one billion photos have been uploaded on the service and around 5m more are added every day, but the service is free and carries no advertising.

Kevin Systrom, the 28-year-old co-founder and chief executive of Instagram, who turned down the chance to join Facebook in 2004, owns around 40% of the company and is set to earn around half a billion dollars from the deal.

Instagram co-founder Mike Krieger owns around 10% of the business and is expected to earn around $100m.

Facebook recently hired the team behind location-based company Gowalla to harness their skills and experience, rather than completing a full acquisition.

However, Facebook chief executive Mark Zuckerberg pledged to keep Instagram going as a standalone operation following the $1bn deal.

Despite instagram's large user base, which is growing faster after recently launching on Google Android, the company's technology is not particularly unique on the market, raising concerns over the scale of cash and stock offer made by Zuckerberg.

Instagram was initially funded with $500,000 of venture capital funding, but later secured wider investment, including from Twitter co-founder Jack Dorsey.

The company, which has a staff of 13, was valued at around $500m last week, but Facebook's offer of double that figure is for a company that has no current revenue stream.

The deal makes instagram worth more than The New York Times Company, which had revenue of $643m in the fourth quarter of last year, and has a market capitalisation of $942m. The US publisher also has more online users than Instagram, at 44m per month.

This has led to fears of a similar technology bubble as seen in the late 1990s, and after the initial flurry of excitement around social networking.

AOL snapped up Bebo for $850m in 2008 but later sold it to a private equity firm in 2010 for just $10m. News Corporation bought MySpace for $580m in 2005, but accepted an offer of just $35m last year for the company, although Rupert Murdoch subsequently admitted that they had "screwed up" the social network.

In the UK, ITV shelled out £120m for Friends Reunited in 2005, but after it was sold to DC Thompson in 2009, the website is only thought to be worth around £5m now.

However, Facebook will soon be awash with cash following its stock market floatation later this year, and the chance to secure a hugely popular photo-sharing brand with a strong smartphone user base could prove more important than profits in the long term.

In a blog post, Systrom insisted that the "cross-pollination of ideas and talent" between Facebook and Instagram will help "improve the way the world communicates and shares".

"It's important to be clear that Instagram is not going away. We'll be working with Facebook to evolve Instagram and build the network. We'll continue to add new features to the product and find new ways to create a better mobile photos experience," he wrote.

"The Instagram app will still be the same one you know and love. You'll still have all the same people you follow and that follow you. You'll still be able to share to other social networks. And you'll still have all the other features that make the app so fun and unique.

"We're psyched to be joining Facebook and are excited to build a better Instagram for everyone."

Another potentially important aspect of the Instagram deal is that it could give Facebook a valuable route into China where it is currently blocked from operating.

Instagram is available in Chinese, and the company has a deal in place that allows users to share photos on Sina Weibo, one of China's most popular microblogging services.

The Wall Street Journal notes that launching Facebook in China would require the company to deal with the state's hugely demanding censorship rules.

However, the Instagram acquisition could give the firm a vital foot in the door, particularly using the existing relationship with the established social network, Sina Weibo.

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