Why Facebook's Instagram Acquisition Makes Sense

by Michael in ,

As you may know by now, Facebook and Instagram have announced the former social network is going to be acquiring the latter for $1 Billion.

$1 Billion is a lot of money. Many have understandably wondered why the valuation is so high. The numbers don't play out for Instagram's current user base or potential revenue streams from the current install base. Still, though, the purchase makes sense.

You see, Facebook has so far been stuck. It has been doing an excellent job of spreading to more people in more countries, but its install base is stabilizing in many western (the US, for instance). Facebook's growth right now is primarily determined by its growing install base, and that install base is increasingly mobile. You might make the mistake of only thinking I'm talking about cell phone internet access in the US and similar countries. Instead, I'm talking about countries like India, China, and many developing nations where much of the population accesses the internet exclusively through cell phones. Facebook's significance has been thus far limited to mobile users, meaning its ability to continue spreading agressively has also been limited. So the first problem Facebook has that Instagram can potentially solve is improving its reach to exclusively mobile users.

Facebook's mobile apps have, as nearly anyone using an iPhone, iPad, or Android device can attest, not been the most pleasant applications to use. They offer a limited subset of the website's featureset, are unstable, and have all kinds of inexplicable bugs that never seem to go away across multiple major releases. So the second (and probably least significant) problem Instagram might help with is having decent mobile developers on staff and the third is having a social network set up for use on a small screen from the start--meaning the mobile experience is the full experience.

That third point is important. Facebook is monetized through advertisements on its main website. There are no advertisements in the mobile apps. Facebook is completely failing to monetize the mobile experience right now. This is surely partly due to the fact that Facebook has already struggled to merely get the mobile applications to reflect most of the basic functionality of the website without also taking extra room for advertisement. It is already having difficulty in its attempts to shoehorn an experience made for the traditional desktop web browser into a tiny form factor without taking up extra screen realestate for monetization. The problem may be solvable, but a solution will not come easily.

Instagram, presumably, already has a plan for continued monetization of its business. Mobile-first and mobile-exclusive social networks will, presumably, dominate the internet in the future. This purchase by the largest "old guard" (read: traditional computer based) social network of the largest "new guard" (read: mobile based) social network is probably the best bet Facebook could make for continued relevance a decade from now.

For now the claim is that Facebook will allow Instagram to operate independently. This is probably a good call. This allows Facebook to perhaps pull a few employees here or there to improve Facebook's mobile operations with their expertise, but it more importantly also allows Facebook to own the biggest player in purely mobile social networking. Who knows? Maybe ten years from now Facebook Inc.'s biggest product will be Instagram and the Facebook website will be a legacy product. We can assume the deal will mean some integration between the two networks down the line, but it's probably in both networks' best interests to allow Instagram to grow on its own and not do anything to sacrifice its experience in order to further Facebook's. Mobile first is the future.

My take: Prospective iPad vs Vita hardware sales for March 2012

by Michael in , ,

Update (3/19/12): Follow-up at the bottom with more specific hardware sales predictions and the associated required software sales ratio.

Earlier today Ben Kuchera, formerly of Ars Technica, now of The Penny Arcade Report, tweeted this:

Wanting to respond with a from-the-hip guess, I posted this:

I was surprised to get a response from Ben:

Seeing as I love having to back up my thoughts (especially if it turns out my assumptions are wrong--after all, why stay wrong about something if I can help it?), I decided to do a little bit of digging. I quickly realized replying on twitter wasn't going to cut it.

Before I start, I do want to say a few things:

  1. I am not a game journalist, or any type of journalist. I'm an amateur who just likes talking about technology, games, and business. If I'm wrong, please let me know, but try not to chew my head off as if I'm leading people astray.
  2. It's really hard to find accurate numbers for things unless you are a business subscribing to NPD's numbers. I don't. I am taking information I'm finding from sources which seem to be giving reasonably accurate numbers. If they're wrong, I'm sorry.
  3. My goal here is really just to see if my response to Ben was a reasonable prediction to make, not to have an A-ha! I'm right and you're all wrong! moment. I have no vested interest in being "right".

Before I start giving links, I want to give my thought process for why my gut reaction was what I tweeted to Ben. The first part of my tweet simply says the iPad will sell many more hardware units than the Vita in March (despite the iPad releasing just today). Honestly, that's simply because I'm pretty certain the iPad has been consistently selling in numbers that dwarf anything video game consoles have ever done. The second part of my tweet will be harder to back, but stems from my assumption that early Vita buyers are so-called "hardcore" gamers who buy many expensive games at retail, while the iPad's buyers are probably not buying the device primarily for gaming--or at least probably not an immense proportion of those buyers. When I typed "This month's Vita buyers...", I meant to imply focusing on these particular people on a per-person/per-device basis, not total. My precise meaning was "This specific month's Vita buyers will, over the course of the device's lifetime, average more money spent on games than the people who purchase the new iPad in March will." That said, I didn't word the statement clearly and can see how it would be easily interpreted as "This month's Vita buyers, in total, will spend more money on games over the course of the Vita's lifetime than this month's new iPad model buyers will." Those are very different statements. I don't want to seem like I'm backpedaling, though, so let's explore both interpretations!

On to what I can dig up!

Argument Part 1 - Hardware

The first iPad was released just 2 years ago. Through Apple's Fiscal Q1 2012, which ended December 31 (less than 2 years of sales, if you're counting) Apple had sold a total of 55 Million iPads (Transcript of Apple CEO Tim Cook's keynote at Goldman Sachs). It sold 15.43 Million iPads in just Q1 2012 (Apple's First Quarter Press Release). That's just one quarter. Yes, it's true that's the big holiday quarter--but it's one quarter nonetheless.

The PS2 and the DS are the best selling video game systems of all time. So let's see how their sales stack up to the iPad 1 & 2 so far. According to Sony itself, the best quarter for PS2 sales since April 2006 (unfortunately Sony doesn't list quarters before that) was 6.7 Million units in Q3 of Fiscal Year 2006. The second best since 2006 was 5.4 Million units. Both of those quarters were holiday quarters. Additional data from Sony (navigable to on the same site): The PS3's best holiday quarters were both 6.5 Million units and the PSP's was 5.7 Million.

According to Wikipedia (fortunately, the sales in the chart are all linked to Nintendo's official PDF reports, so they're checkable), the best ever quarter for the DS, DS Lite, DSi, and DSi XL combined was the holiday quarter of 2008 with 11.89 Million units shipped that quarter. That was the same quarter in which the DS set the US record for most video game system sales in a single month (3.04 Million in December, versus the PS2's previous record of 2.7 Million). The Wikipedia chart only lists life-to-date numbers, so I had to subtract the previous quarter's number from the one I was checking to find a given quarter's sales.

The numbers aren't perfectly apples to apples comparisons (pun not intended). We don't really have holiday quarter sales for earlier in the PS2's life while it was at its sales peak, so the PS2's data isn't incredibly useful. The DS seems to have exceeded the PS2's sales peaks, though, and still fell short of the iPad. Suffice it to say the Vita is not currently likely to be approaching sales comparable to the PS2 and DS during their peak years. So it's spretty safe to assume the iPad will outsell the Vita by a wide margin, even with just half the month to work with.

I've spent all this time so far defending the part of my argument that nearly no one would contest. Honestly, I just did that because it was fun. Now for the truly arguable part:

Argument Part 2 - Software

As I said before, there are two different possible interpretations from the software part of my tweet. First is that this month's Vita purchasers will average more total lifetime money spent on games for their Vitas than this month's new iPad purchasers will average in total lifetime money spent on games for their iPads. Second is that this month's Vita purchasers will total more lifetime money spent on games for their Vitas than this month's new iPad purchasers will total in money spent on games for their iPads.

Back to Sony we go for software numbers. If we look at PSP software sales since 2006, we get the best single-year sales at 54.7 Million pieces of software (2006--PSP software sales decreased from then on). The same year had nowhere near the highest hardware sales for the system (at just 9.6 Million units), so 2006 easily had the highest Hardware/Software ratio for the PSP from 2006 onward: 5.7 games per system sold. Keep in mind, this isn't lifetime. Unfortunately, it's also just academic because we don't have launch numbers--so those games are being purchased by people purchasing 2006 hardware as well as people who purchased hardware in 2004 and 2005.

To help me illustrate something, though, let's look at the PS3's numbers--which Sony thankfully does have launch numbers for.

  • The PS3's 2006-2010 per-year hardware numbers are: 3.5, 9.1, 10.1, 13, and 14.3 Million units sold. So the systems sold per year have increased each year over year.
  • Its software has followed the same pattern so far, with 13.3, 57.9, 103.7, 115.6, and 147.9 Million software units sold in the same respective years.
  • That makes the attach rates for 2006-2010 into 3.8, 6.36, 10.26, 8.89, and 10.34 pieces of software sold per system sold each year.

Again: That doesn't mean everyone who purchased a PS3 in 2010 bought an average of 10.34 pieces of software. Early system purchasers are still buying software for the system. This is just giving you an idea of what the numbers look like so far. The numbers become more useful if we look at cumulative attach rates.

  • Cumulative hardware to-date for each year from 2006-2010 comes out to 3.5, 12.6, 22.7, 35.7, and 50 Million PS3s.
  • Cumulative software-to-date for each year for 2006-2010 is 13.3, 71.2, 174.9, 290.5, 438.4 pieces of PS3 software sold.
  • So the cumulative attach rate for each year is: 3.8, 5.65, 7.7, 8.14, 8.77 average pieces of software sold lifetime for every single PS3 sold through the end of fiscal year 2010.

It's probably possible to do some math with those numbers to determine sales of early adopters versus later console buyers. I started doing the math and confused myself (I was too lazy to get out a pen, paper, my graphing calculator, Excel, etc.). My hunch (which I think is probably pretty accurate) is that people who buy consoles early are more likely to buy a large collection of games than people who buy them later.

So for the PSP we have that 5.7 ratio number and for the PS3 we have an 8.77 number, both of which I think are lower than the ratios applied specifically to early purchasers. What do you expect the average selling price for PSP software is? I'll use $9 as an arbitrary pessimistic guess. So that would mean an average of $51.3 spent on games per PSP owner assuming just a $9 average software price (highly unlikely for early adopters--after all they had to buy at least one launch game at $35+). A (in my opinion) more realistic average game price for launch PSP buyers of $15 takes the total they spent on games to $85.5 if we limit them to that 5.7 ratio (which is, frankly, probably unfairly low when we're talking about launch buyers of the PSP who didn't know about the hacked firmware piracy/emulation market that would crop up later).

The PS3? If we took the cumulative 8.77 average software/hardware attach and multiply it by just $25 as average spent per game, we hit $219.25 spent on software per system. Again, we're not skewing for early adopters here.

Besides, even if the 2006 purchasers never purchased another game for their systems, they still each bought 3.8 games at launch-system pricing (there were only 2 quarters in FY2006 for the PS3, and not even for the entirety of those quarters). If you estimate low and say each of those games were purchased during the launch window at $40 (versus the standard $60 launch price), that's a bare minimum of $228 paid for PS3 games per owner in 2006 alone. If any of those initial system purchasers ever buy another game, that average goes up.

How many new iPad owners do you think will spend $228 on games alone for their iPads? Now consider that's an intentionally very low estimate for early PS3 buyers. Sure, the average selling price of games on the Vita is lower, but it's still very much gamers buying a game system with the intent to spend money on games. The numbers might be lower, but the lifetime average will certainly pass $200, if not significantly higher for these launch window buyers. After all, these numbers just go through 2010. At least some of those launch PS3 buyers are still buying games.

Realisticaly, the attach numbers for the PS Vita will probably be somewhere between the PSP and the PS3. The attach rate for the PSP was notoriously abysmal with many people buying the PSP just to crack the firmware and play free games on it. Handhelds have never had the same attach rates as home consoles, though, so we probably shouldn't expect PS3 numbers. Even so, I find it doubtful that the average new iPad buyer will end up spending multiple hundreds of dollars on games alone. (It's certainly plausible the new iPad owners will beat out Vita owners on average dollars spent on software when you combine all iOS software categories, but we're just talking about games here.)

So yes, I do believe my statement was true if we're talking averages. Totals though... that's another issue.

The total is, obviously, equal to the previously discussed average money spent on games per device times the number of hardware units sold. Because I'm fairly certain the iPad will outsell the Vita on hardware while the Vita's owners will spend more per-owner on games long-term, the issue becomes ratios. If the new iPad sells twice as many units (in half the time--since it's only on sale for half the month), its owners only have to average half the long term game dollars spent as the Vita owners. This is a tossup, as I have absolutely no projection as to what the ratio of new iPad to Vita hardware sales will be for March.

My gut, though, is to say the brand-new-as-of-March-2012 Vita owners will still end up spending more on Vita games than the brand-new-as-of-March-2012 new iPad owners will end up spending on iPad games long-term. My gut tells me this because, well, I'm an early adopter in both realms. (Luckily, I also keep all my receipts from iTunes and Amazon!) I have a 3DS on which I've actually only purchased a handful of games (only 3, in fact, so far) which I've spent a collective $116 on. I've also had an original iPad since launch as well as an iPhone 3G since launch, replaced by a current 4S. I play and purchase far more games than the average iOS owner does--and I'd bet I spend far more money on apps, and the game subgenre of apps, than the average early adopter does. iOS games are so cheap, though, that my grand total of money spent on iOS games including many I purchased for iPhone--and duplicates for which I've purchased both iPhone and iPad versions, totals $135 since I purchased my iPhone 3G in June 2008. So most of 4 years later, my total iOS game purchases are a little higher than the money I've spent on games for the 3DS--which I purchased 5 months ago.

It is highly unlikely so-called "non-gamers" will spend money buying games on their new iPads at anywhere near the rate I have, while the people buying Vita's right now are exclusively gamers buying the system so that they can purchase games for it.

So while it's highly likely the total amount of money spent on iOS games will exceed that of the Vita (or the Vita + 3DS combined), I think this particular half month of new iPad buyers will probably still total less money spent on iPad games than this particular month of Vita buyers will total money spent on Vita games long-term.

As I said before, this isn't my job and I don't have more reliable long-term data, so I did the best I could. I'd love to be able to look at guaranteed accurate quarter-by-quarter sales for all these pieces of hardware (and respective software) since launch to get more accurate predictions. I am aware that I was switching between real numbers and conjecture, but I tried to clearly label which was which. Still, I think this was enough effort to ensure my predictions and opinions are reasonable.

Now if you'll excuse me, I have to go play Mass Effect 3 on my Xbox 360 (with the iPad Mass Effect 3 Datapad app on hand, of course). If I finish this weekend it'll mean I can finally get around to reading Ben's article about the series' apparently divisive ending.

→ Research, no motion: How the BlackBerry CEOs lost an empire

by Michael in ,

Research, no motion: How the BlackBerry CEOs lost an empire

Last week Jesse Hicks at The Verge produced an incredible look at the fall of RIM.

It's possible RIM can be turned around. After all the currently most valuable company in the world was just 90 days from bankruptcy back in the late 90s. If RIM does pull out of this free fall, though, it's not going to be because it stuck to its guns. The company needs to see some massive internal change.

→ A new standard in design: in-depth with the PlayStation Vita

by Michael in ,

A new standard in design: in-depth with the PlayStation Vita

A small snippet from Ars Technica's thorough look at the hardware (added emphasis mine):

It's a confusing time in the world of mobile and portable gaming. Consumers seem to be moving away from the idea that they need an entirely separate device to play games on the go, settling for cheap, generally simple touchscreen games on their cell phones and tablets. Nintendo, following up the insanely successful DS system that rested on a seemingly gimmicky double screen design, added a newer glasses-free 3D gimmick to its Nintendo 3DS—only to see extremely slow sales force it into a premature price drop. Sony's PlayStation Portable, meanwhile, has carved out a niche for itself as a serious gamer's system, especially in Japan, but is beginning to show its age as a system designed in the pre-smartphone era.

For the new PlayStation Vita, Sony responded to this confusion by throwing everything and the kitchen sink into the system. For hardcore gamers, there are two analog sticks—a first for a portable system—and a gigantic screen loaded with pixels. For casual players, there's the now-ubiquitous touchscreen as well as a unique rear touch panel to enable new tactile, touchy-feely gameplay. The Vita has two cameras, a GPS receiver, and a 3G data option. There's music and video players, a Web browser, Google Maps, and even a proximity-based social network. Oh, and it also plays games, I guess (more on those in a separate post).

It's a curious approach. What's likely to keep standalone portable video game systems afloat in the face of cell phone gaming is not processing power or connectivity--the rapid improvement in iterative cell phones will always dwarf static platforms in these areas after the gaming systems have been on the market for a short time. The advantage of these dedicated game systems is in the optimization for gaming itself: developers can spend long development cycles on ambitious game designs because the hardware target stays the same for a long time and control mechanisms can be offered which can not be touched by devices which need to be more flexible.

Sony's approach hasn't sacrificed that optimization here, but the entire fate of the system's success rests on how well it performs in the games area. These dedicated systems will never be preferred by a large enough audience over a good smart phone for most things. The PS Vita and Nintendo 3DS will be purchased--or not purchased--entirely on whether people who care a lot about playing really good games decide the quality of gaming on offer is worth having a dedicated device at all. The Vita and 3DS don't have the advantage home consoles have of being set up on the television--the display people use for any number of things, thereby justifying all manners of streaming media and family interaction as a selling point. If gaming ends up being an afterthought on the Vita (I'm not implying it is--it is far too early to tell), the device will fail.

Let's see how this plays out. I think there's more than enough space for both the Vita and the 3DS, despite the burgeoning smart phone market--even if they become a rapidly decreasing percentage of the total portable game market's revenue.

In the meantime, check out the article at Ars. There's a whole lot of detail there.