Lowenstein's View: Is the mobile M&A binge crazy or justified?

Here's something to chew on when thinking about valuations in mobile vs. legacy online businesses. A mere two weeks ago, Facebook acquired mobile photo sharing app Instagram for $1 billion. Instagram had amassed 27 million subscribers, but had no revenue and fewer than 20 employees.

By contrast, Shutterfly confirmed this week its acquisition of Kodak Gallery, an online photo storage and publishing division of Kodak, for $23.8 million--and the absence of any competing bids. Kodak Gallery had certainly been on the wane and Shutterfly had been steadily eating into its share, but with the Gallery's 75 million global subscribers and 1 million monthly unique visitors, the contrast between $1 billion and $23.8 million is somewhat startling.

Are we in a bubble or is something truly disruptive happening? Those looking at recent mobile app-related deals--whether it's Instagram or Intuit's circa $80 million acquisition of mobile payments company AisleBuyer ($11 million raised, 37 employees, a handful of customers)--will not be successful using conventional metrics when trying to understand these valuations. We're also starting to move beyond "aqui-hire" type deals, where companies will pay a premium price just to "buy" vs. build, and fast-track the hiring of needed development talent.

Rather, I think this craziness is attributed to a number of inter-related factors.

First, if you look at some of the fastest-growing, most promising segments of mobile--advertising, commerce/payments, social networking/community, enterprise/cloud, digital content--the number of companies that really matter and are doing much of the buying is relatively concentrated: Apple, Google, Facebook, Twitter, Amazon, Microsoft, eBay, Intuit, Visa, SAP, Oracle, Disney, Comcast. Many of these companies are in multiple, overlapping segments and are engaging in a virtual arms race with each other. The need for speed (offensively and defensively) is leading to a sort of artificial inflation in the industry, where future value is given a premium. Intuit acquired Aisle Buyer largely because it is playing from behind in mobile, and is trying to quickly catch up with eBay/PayPal and fend off Square.

Second, concentration in platforms is leading to more rapid scaling of businesses. In the past year, we have seen the market largely coalesce around iOS and Android, even in the enterprise. Additionally, nearly all major operators are now selling both iOS and Android- based devices. This allows developers to more effectively allocate their resources, and allows users to feel relatively confident that they will be able to get a desired app irrespective of which OS or operator they choose.

Third, there is a certain "monopoly money" effect at play here. Let's face it: trying to explain Instagram's $1 billion valuation is tough when we don't fully understand what is behind Facebook's $100 billion valuation. The timing of the Instagram deal is no accident. The terms would have been more carefully scrutinized if Facebook were a public company and would have been criticized if the much-hyped IPO had fallen short of expectations.  If there is irrationality, it is certainly higher when companies are still private and have the ability make such purchases.

Finally, many of these power buyers are sitting on boatloads of cash and are racing to keep up with growth rates that in their core business defy gravity. They need to race into adjacent segments just to keep up. We're also dealing with nascent industries and industry segments where financial and other measurement metrics are still developing. For example, five years into E-books, we know that these businesses are largely substitutive of print sales and brick-and-mortar distribution. But is mobile shopping accretive or substitutive? Who knows.

What does this all mean? Expect this frothy M&A period to continue for at least a year. I believe Apple will use its strong position to make one or more major acquisitions in the content/living room space, and in the enterprise segment. There will be aggressive positioning in mobile shopping/payments/commerce. Twitter will also do more, in advance of an IPO (or being acquired itself), and the deeper scrutiny that comes with it. I also expect some consolidation in the mobile enterprise space. A lot of companies have raised money over the past year but the field is crowded and larger enterprise players such as Oracle, SalesForce, and Microsoft are playing catch-up in mobile. Also, combine two hot segments - mobile and cloud - and you're likely to have a feeding frenzy.

So, is the mobile M&A binge crazy or justified? Probably both.

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem.  Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.