The $1 billion purchase by Facebook of Instagram, a startup with a hot mobile photo app, was played up by the New York Times as a way for Facebook to stave off competition–“eat the new start-up before it eats you, or before a competitor grabs it.”
However, there’s another way to think about the Instagram purchase. Facebook just sent a strong signal to potential entrepreneurs and venture capitalists: If you have a good idea for an app, or can find someone with a good idea for an, you can get very rich very quickly by being acquired by a Facebook, or a Google, or a Microsoft. All of a sudden starting or financing a new company, with plenty of new employees, looks a lot more appealing.
In effect, an acquisition such as this one will likely stimulate competition, investment and job growth in the App Economy. Nothing spurs business creation and job growth like the prospect of making money fast. And the existence of deep-pocketed acquirers who are willing to spend heavily accelerates entrepreneurship. One startup today (Instagram) may be replaced by five tomorrow. (This argument was made at length in a paper I wrote last fall with Diana Carew “Innovation by Acquisition: The New Dynamics of High-Tech Competition.” )
What about the argument that purchases like this one are just fueling a new bubble? My answer: Having lived through the boom and bust of the 2000s, I’d be very happy to get a repeat of the boom and bubble of the 1990s. At least the dot.com boom one left us with the Internet and a full cabinet of new capabilities, rather than a bunch of empty houses and bankrupt countries. A technology bubble beats a financial bubble, any day of the week.
Mandel on Innovation and Growth 
You’re confusing the bubbles with the good developments that happened during those times, yet selectively declaring one better than the other. The dot.com bubble was just as destructive in many ways: plenty of money was frittered away on pets.coms and fiber-optic lines that are unused to this day. Perhaps the dot.com bubble wasn’t as big, but then you’re just happy to have a smaller dot.com bubble than a bigger housing bubble. If anything, you could argue the dot.com bubble was worse because the sudden influx of money diverted the tech sector from its natural exploration process, into a whole bunch of dumb ideas that were more driven by vacuous VCs than by the technologists. You could argue that the get-rich-quick mentality that resulted has negative repercussions to this day, ie over the longer term, whereas all the housing bubble did is put people in overpriced houses and mortgages for 5-10 years, while the damage done by the dot.com bubble could persist for decades.
Witness how all these dumb startups aren’t trying to make money even today, just build as big as you can and cash out to the greater fool, which is why former acquisitions like Youtube lose money even now, not to mention bombs like MySpace or Bebo. This Instagram acquisition is another in a long line of dumb decisions birthed out of the dot.com bubble, but I’m not sure anything can be done about it as that’s the only way people seem to learn, by being burnt repeatedly.