Instagram’s remarkable acquisition: A discussion

Regarding Instagram’s successful sale to Facebook (see here): what do you think are some of the important reasons that led to (a) Facebook buying it and (b) Instagram getting valued at an astonishing $1 billion?

Zuckerberg stated in the press release that “we’ll be able to work even more closely with the Instagram team to […] offer the best experiences for sharing beautiful mobile photos with people based on your interests”. At first glance, it would seem incredulous that a “fun & quirky” app would warrant such a huge price tag. However, there must be more to this story. Let’s dig deeper.

Instagram's amazing sale to FB - image

Here are some points that come to mind:

–  Facebook seeing that it has no killer app for the mobile OS ecosystem: since mobile platforms will be the dominant web platforms in the future, FB must be placing great importance and value to establishing a solid foothold in the hearts, minds and pockets of millions of consumers, in a way that it doesn’t see itself being able to do solely through its Facebook app.

– In addition, Facebook would get access to a huge established user base from which to launch additional mobile products and initiatives. Keep in mind that many of these mobile users will be accustomed and willing to make payments in their apps (as compared to most online Facebook users, who do not spend a cent in it), so it might be seeing their long-term monetary potential as users of multiple Facebook-owned apps.

– Facebook seeing the value of user data generated in Instagram – information about image locations, check-ins and friends from the profiles of Instagram’s users – that would be valuable for Facebook to exploit for its targeted advertising and data mining efforts. In fact, there is already a web article telling users how to protect themselves from having their Instagram data harvested by Facebook.

– Instagram might have been seen as a good competitor to Path, the leading mobile social platform that Facebook must be worried about. Hence, FB may have bought Instagram to defend its mindshare in the mobile OS ecosystem against this potential looming threat.

– Facebook feeling that Instagram would be able to keep up its rapid user growth: it reached 30 million iOS users in 18 months, and its Android app garnered 1 million downloads in a day.

– Facebook finally realizing that much of its core appeal to its users lies in the fact that it is basically the world’s premier web photo sharing platform, and wanting to take that to its logical conclusion: seeking to also become the world’s number one mobile photo sharing platform.

– (may seem far-out, but might have some bearing in truth) Facebook, in its patent war against the rapidly crumbling Yahoo, might have decided that it needs to own a leading social photo platform to take on and overtake Flickr, Yahoo’s own acquired photo platform.

What does the timing of the deal (just after Instagram’s successful Android launch, and just before Facebook’s IPO) tell us? Could Facebook be desperate to provide potential investors and fund operators with the picture of a stronger and more profitable company by acquiring a leading player in the mobile-social ecosystem, in order to justify its own high valuation (which is also inflated, in many investors’ views)?

In addition, given the mixture of stock and cash that Facebook is paying for the deal with, it could be possible that Facebook’s top management is well aware of its own potentially inflated valuation, and is seeking to use its current $75-$100 billion valuation as a cheaper way to pay in the long run using stock that they know will probably devalue, than merely using cash (possible, though questionable).

So, what do you think? I’d like to get your thoughts and feedback on this.

7 thoughts on “Instagram’s remarkable acquisition: A discussion

  1. I think it has a lot to do with mobile, Facebook really needed some product in the mobile space. Also this will add a lot of mobile users for them. Zuckerberg says that Instagram will continue to remain a separate product, may be it is the beginning of Facebook moving away from a company of single product.

    • Hi Asankhaya, thanks for the feedback. Yes, the more I think about it, the more it seems that FB wanted to establish itself as the leading social photo sharing platform for the mobile platform (in addition to the web) in one fell swoop. Of course, I’m sure that FB’s management have high hopes for Instagram to greatly expand its userbase (to around 100 million+ users on both iOS, Android & WP7), so they are not only paying for the current users, which would help to explain the $1bn valuation.

  2. From Instagram’s perspective, I think it makes sense for them to sell. Instagram has no revenue model but they are getting lots of funding. With more investors, Instagram somewhat have to answer to them about the financial growth and returns. Investors can’t possible throw in money into a bottomless pit. Instagram user base is small compared to Facebook and Twitter. Instagram relies on Facebook and twitter for some user accounts and let users share photos to their websites. In a way, Instagram is dependent on other social networks but not totally. The low barrier of entry makes Instagram easy to copy, for e.g. Tiny Review. Not forgetting, Facebook can easily copy their features and integrate it into their mobile app. With more competitions arising, Instagram have to think of something to survive.

    Instagram is valued at 500 million with the latest round of funding. The offer (x2 the valuation) is just too attractive for a 2 years old company to miss.

    From Facebook’s perspective, I think they want to have a stronger foothold in mobile apps. Clearly, there are a growing number of apps that are taking away some of their customers. In particular, Instagram segmented it’s users to people that likes to take photo. As an avid Instagram user, I like the small eco space given by Instagram to share my photos. Sometimes I will share it to Facebook but most of the time I don’t. I also know of friends that use Instagram to update the places they visit as Facebook is banned in China. Buying over Instagram will mean buying back the customers they have lost.

    • Yes, the decision to make the sale seems quite obvious from Instagram’s perspective. Facebook’s decision to buy it at this price, apart from the above reasons, also seems to be based on a calculated gamble – that they will be able to use Instagram as a launching pad to become the premier mobile media platform across the different OS platforms. They must be seeking to expand their mobile offerings to include video, music, etc, possibly using Instagram’s tech and UI to build these functionalities, as well as using the passionate Instagram userbase as a captive audience.

      Of course, there is a big risk of FB changing the app to include unwelcome web advertising elements or other unwieldy “features” from into Instagram. As you pointed out, its users love the simple and streamlined UX, and would hate such changes to the app. That will be a challenge for FB to navigate, and it speaks volumes that both Zuckerberg and Kevin Systrom emphasised that Instagram will be “independent” and will maintain its features like the ability to post to other social networks, the ability to not share your Instagrams on Facebook, and the ability to have followers and follow people separately from friends on Facebook.

  3. As what we have learned from the case study on Kong Zhong. It’s often a race to go IPO and then start consolidating smaller competitors or “complements”.

    In the case of social technologies and platforms, the true connectivity comes from mobile experiences and therefore as some of you has noted, FB will try to acquire anything in the food chain or value chain which will improve its value and gravity inside this “connectivity-age ecology”

  4. Thanks for sharing, Parth.

    We were trying to find a monitization model for Instagram, and it seems they just found one!

    Jokes aside, I think in a long term, Facebook might benefit from this move. Indeed, the combination of FB and Instagram has a huge potential, FB’s fast reaching ability might push Instagram to a new height if it become part of FB’s service. Compare to the strategic benefits FB obtained and Instagram’s great potential under the trend of mobilization, 1 billion for FB was not as much as the figue suggests.

  5. I think they found the threats from Instagram’s rapid growth in mobile space. They want to be your one and only social network. Also, perhaps, they feel the pressure from Twitter as well. If Twitter purchases Instagram first, it is a serious threat to Facebook’s dominance in social networking field.

    However, 1B for a 2-year-old company without a clear monetization strategies is a huge overpriced. I don’t think we will encounter such a high valuation for another company in the next coming years. Instangram’s success is a one-off thing. It just happens that Facebook, being valuated at an insane high price themselves, spent some of that money for another start-up which follows a similar strategy as they were since day 1.

Leave a Reply

Your email address will not be published. Required fields are marked *