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Summary:

What is about Instagram that has made Facebook open up its checkbook and spend nearly a billion dollars in stock and cash to buy up a company only in its third year. There are many reasons, and the biggest one is fear.

Instagram CEO Kevin Systrom thumbnail

You might have heard by now that Facebook has acquired Instagram for nearly a billion dollars in cash and stock. Incredible, isn’t it? I have received text messages of awe and shock from many people in the Valley, for no one saw this coming.

A few days ago it was rumored to be valued at $500 million. A few months ago it was $300 million. Its last round — just a year ago – valued the company at $100 million. The rising valuation of the company was reflective of the growing audience it has been garnering, despite being just on the iPhone. It had reached nearly 30 million registered users before it launched an Android app, a turbo-charging event for the company.

So the question is:  Why did Mark Zuckerberg, Facebook’s level-headed but mercenary founder, buy Instagram at twice the valuation that professional venture investors were putting on it? The answer is found in Zuckerberg’s own blog post:

This is an important milestone for Facebook because it’s the first time we’ve ever acquired a product and company with so many users. We don’t plan on doing many more of these, if any at all. But providing the best photo sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together.

My translation: Facebook was scared shitless and knew that for first time in its life it arguably had a competitor that could not only eat its lunch, but also destroy its future prospects. Why? Because Facebook is essentially about photos, and Instagram had found and attacked Facebook’s achilles heel — mobile photo sharing.

Here is what I wrote when Instagram launched the Android app.

It is pretty clear that thanks to the turbocharge effect of Android, Instagram’s user base is going to blast past the 50 million mark in a couple of weeks. Just before the company launched its app in October, I had pointed out that there was going to be a mobile-only, photo-oriented social platform that will challenge the established social giants. It will be a summer to remember for this tiny company.

Here is another little bit from one of my Om Says newletters:

The company had announced an API in February, and since then a raft of new apps have come up to capitalize on it. While filters might have jumpstarted Instagram, the company, which already has over 4 million subscribers, has to focus on its core value proposition – community and the social interactions around unique visual experiences.

I hope Instagram allows more apps to export directly to its network. By opening itself up to other apps and services, it has the potential to slowly become the hub of our mobile photo experiences. And in the end, that’s what would make Instagram so much more valuable and in the process become the Flickr of mobile photos.

In other words, if there was any competitor that could give Zuckerberg heartburn, it was Systrom’s posse. They are growing like mad on mobile, and Facebook’s mobile platform (including its app) is mediocre at best. Why? Facebook is not a mobile-first company and they don’t think from the mobile-first perspective. Facebook’s internal ideology is that of a desktop-centric Internet company.

Instagram is the exact opposite. It has created a platform built on emotion. It created not a social network, but instead built a beautiful social platform of shared experiences. Facebook and Instagram are two distinct companies with two distinct personalities. Instagram has what Facebook craves – passionate community. People like Facebook. People use Facebook. People love Instagram. It is my single most-used app. I spend an hour a day on Instagram. I have made friends based on photos they share. I know how they feel, and how they see the world. Facebook lacks soul. Instagram is all soul and emotion.

It is one of the reasons I connected with the app even before it launched. It went deeper than just a photo app. Over the years, Kevin shared his grand ambition about Instagram and building a much larger platform, so from that perspective I guess I am a little surprised – though I thought Kevin and his team would go a lot further, for as Erica pointed out last week, the best is yet to come for mobile photos.

More importantly, it cracked the code where Facebook itself failed: viral growth on mobile. From that perspective I wonder if Kevin sold too soon, though I know it is easy for me to say. But then the road from product and a platform to a business is long, twisted and full of potholes. Perhaps that explains why the Instagram team decided to cash in their chips.

  1. J Nicholas Gross Monday, April 9, 2012

    An HOUR a day on Instagram? I’ve been tracking your stories for a long time and it now seems you’re up to 26 hours a day on SOME platform or the other.

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    1. Lol. Multi-tasking. Also, I have been a big instagram-addict. i spend a lot of time on it for the fact it is a magical portal into magical lives.

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      1. “I know how they feel, and how they see the world. Facebook lacks soul. Instagram is all soul and emotion.”

        Seriously?

        Very poetic, Om. And sure Instagram is great, but it’s also a camera app with cool filters. The rest (of its worth) is about the users, and they couldn’t have found a better acquisition prospect than Facebook.

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      2. “I know how they feel, and how they see the world. Facebook lacks soul. Instagram is all soul and emotion.”

        id dispute this observation! i have a distinct persona on Facebook, offering up humorous pics gleaned from friends on Facebook, Instagram, imgur, and Flickr. i have a core group on Facebook who apparently like my dry humor and vision. I also appreciate their humor and vision also. i have gotten to know people on Facebook without ever talking with them on the phone or in person–just through Facebook posting. i feel there is a TON of soul behind some of those profile pics and hope they experience me the same way.

        i do agree that Instagram is a better ‘add-on’ to Facebook than any other photo app and see this symbiosis as something transformative and complimentary to each world. It may even be ‘The Next Big Thing’ on the internets!

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      3. Dazzling DewDrops Tuesday, May 8, 2012

        could u explain about the features in instagram!!!

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    2. job hazard !?!

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  2. JACOB ANDERSEN Monday, April 9, 2012

    why doesnt the gov block this merger?

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    1. Sudhanshu Saxena Monday, April 9, 2012

      On what grounds could this be blocked ?

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    2. Marshall Kirkpatrick Monday, April 9, 2012

      omg they need a thumbs up and LOL emoticon button on this blog so I can click them both under your comment

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  3. Sudhanshu Saxena Monday, April 9, 2012

    Good, an enlightening analysis. But was there not a way for Instagram to go even bigger, answer to this would be a good story is it not ?

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    1. It was going to be a much bigger platform, or atleast I thought so. I think they key was – what the founders wanted to do. Clearly their life has been changed.

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      1. Sudhanshu Saxena Monday, April 9, 2012

        Truely its a huge money involved and we will be hearing founder stories. How would this change the scene the way image sharing is now, like pinterest for instance ?

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      2. Dody Luhansa Monday, April 9, 2012

        it will not go bigger than facebook if ppl can’t use it for free..without paying any internet connction or if it is only in android and iOS.

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      3. I agree with your words written here, very accurate description of this acquisition.
        nevertheless, things are a bit different when its facebook that makes this huge bid, its more difficult to decline. as i see it in any other case they wouldn’t have sold.

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  4. “But then the road from product and a platform to a business is long, twisted and full of potholes. Perhaps that explains why the Instagram team decided to cash in their chips.”

    While true some things can be done easier when working on scale. The question will be if FB’s execs are going to support it and let it happen.

    “Every day that passes, we see more experiences being shared through Instagram in ways that we never thought possible.”

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  5. Andrew Chalkley Monday, April 9, 2012

    $1 billion today != $1 billion a year, two years or three years ago.

    Today’s dollar doesn’t by the same amount of stuff as yesterday’s dollar. We’re not just in a new tech bubble but a currency bubble.

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    1. Yeah, currency bubble, what with sub-3% inflation and all! What the heck are you talking about?

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      1. Nice one Jon. :-)

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      2. There is no big inflation in goods and services the consumer buys but one in shares and vc, the money that is printed by the FED has to go somewhere. Here is one example where it goes to.

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      3. The only reason that there is no official inflation is that housing is *included* in the CPI, but “energy” and “volatile foods” are *excluded* (read: they don’t want you to be reminded of high gas prices, low house prices and paybacks to farmers, who benefit most from inflation). If we had measured inflation the way we do today back in the 70s, there would, officially, have been no “stagflation”. QED.

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  6. too soon to sell :-( would love to see this separate rather than clutter along w/ FB…

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    1. Michael Clarke Tuesday, April 10, 2012

      ‘too soon to sell’ clearly you have no experience of a business exit. They join a group that numbers at best a handful of people globally! In the UK the founder of friendsreunited.com sold for circa 200m and the purchasers offloaded it for many times less than that. Instagram is massively overvalued and they have done remarkably to achieve this price. They have 8 employees For Gods sake.

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      1. Clearly you didn’t read the article posted up top of the page there.. If Instagram really did pose a serious threat, and really planned to become flickr in the mobile space, a cool billion was quite likely on the low side of things and too soon.

        Then again, I’m still pretty sure this is a simple user/data buy up, in any case, who the hell are you to act like you know what Facebook was really willing to pay or how big Instagram could have been.

        PS, 8 employees for an app that takes pictures? Overkill. Learn something about the industry other than the $$$ signs, maybe you’ll understand things a little better, possibly even sound less like a douche while talking down to people over the internet.

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  7. Instagram has added 6 million users in last 6 days after android launch, this acquisition was coming

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  8. There is absolutley no IP with Instagram.

    So easy to start another exact near duplicate of this Ap.

    It would probably take 4-6 weeks and cost $10k -$15k.

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    1. Venkatesh Sridhar Monday, April 9, 2012

      Then why don’t you start one if it’s so easy?

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      1. Nah he’s right. Isn’t pinterest a clone for any bookmarking service? Cheap clone btw. But very very good UX. In the end, what’s really important is always how you implement the idea and how much money/power/network you have to make the idea grow and be noticed by users.
        As said Nikolaus, given the valuation, tons of clones ( adding to the already existing ones ) are going to come out.

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    2. It’s about the users… you can try and duplicate them but can you get 30+ million users?

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    3. nikolaus heger Monday, April 9, 2012

      Given the valuation, that’s what’s going to happen… 10 new instagrams will pop up. I imagine FB knows this and for that reason will leave instagram alone until it “won” against all these new clones….

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      1. More clones will come, but lots (dozens if not hundreds?) of very similar services already exist – picplz and Hipstamatic are two examples that come to mind. Instagram’s stylishly simple UI/UX, focus on solving one problem extremely well and brilliance/luck/relationships in becoming “Twitter for Photos” won this race. Potential clones would be best served putting their efforts towards other efforts – video perhaps?

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  9. Kiah Duncan Monday, April 9, 2012

    Great move by Facebook…. Eating up the competition

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    1. Totally agreed. i think this is Zuckerberg at his best.

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      1. LOL! Om agrees this is a great move! $1 B acquisition of Instagram is Zuckerberg at his best. Contrast this with Om’s comment about Google’s acquisition of Youtube in which he called Google a loser (http://gigaom.com/2006/10/09/goobed/): “I think this is Compaq-DEC, Skype-eBay kind of a deal for them (Google) in the long run”.

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    2. nikolaus heger Monday, April 9, 2012

      Totally – Zuckerberg is just thinking about the question “what could replace Facebook” and instagram is on top of the list. Money is no issue given Facebook’s own (ridiculous IMO) valuation. I think FB is way overvalued but Zuckerberg is making the best of it with moves like this. This is no time to skimp.

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    3. Sure, but let’s define competition in this instance. Would Instagram ever compete at a platform level? I highly doubt they would have ever grown to that capacity. Would they ever compete at a user level? Facebook laughs at 30-50 million users and I’m sure 99.99999% of Instagram users are Facebook users anyway. Where Instagram does compete is in time spent using the service, which is directly translated to lost advertising revenue for Facebook. With the IPO coming up, preserving revenue streams is of the upmost importance, which may account for the rash “make vs buy” decision. It will be interesting to see what they actually do with the service as it’s not in their best interest to let it remain as-is other than to save face… which they hardly care about :/

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  10. IndianF1Fan Monday, April 9, 2012

    OMG that was a nice read Om sir! really loved the way you put the facts on the table!

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    1. Thanks

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      1. Has Instagram even made $1?

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