Facebook is scared of the internet

[Commentary] It is no wonder that Mark Zuckerberg got so defensive this week. As he was paying $1 billion to eliminate the threat to Facebook from Instagram, an 18-month old photo sharing site, the web’s former giants were being humbled.

Yahoo, which unveiled another reorganization under its fifth chief executive in five years, and AOL, which sold a portfolio of 800 patents to Microsoft for $1.1 billion, are under attack from hedge funds. Both are worth a fraction of their value during the 1990s internet bubble.

Silicon Valley was always competitive but barriers to entry in the late stages of the social network boom are so low, and capital so plentiful, that creative destruction is on fast-forward. If Facebook, which is about to launch its initial public offering, will pay $1 billion to neutralize Instagram, how much are Path, Pinterest and others yet to be invented worth? Warren Buffett is famously averse to technology investments because of their unpredictability, and the consumer internet has the shallowest moat of all. Facebook’s bulwark is the network effect of having millions of users but Instagram’s rise and the fall of Bebo, MySpace and others shows how fragile it is. Zuckerberg has so far avoided the pitfalls by handling the rise of Facebook cleverly, and reversing his mistakes rapidly enough not to alienate users. But as its growth has slowed in the US, he has clearly got worried at the growing competitive threats to its dominance. Instagram was one but there are others, some of which would be even more expensive. The internet has a nasty habit of consuming its mature companies – Yahoo took 18 years from being founded in 1994 to get into its current state. Facebook will be lucky to last that long.