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Summary:

Some believe that Facebook’s $1-billion purchase of Instagram makes sense, but others argue the dollar value of the deal seems almost unbelievably high. Is it another sign of a tech-startup bubble, or a smart move by Facebook to lock up a potential competitor?

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It might have been just a regular Monday for most people, but the Silicon Valley/social-media sphere was rocked by a major bombshell: Facebook co-founder and CEO Mark Zuckerberg announced in a blog post that the giant social network is acquiring the popular mobile photo-sharing app Instagram for $1-billion in cash and stock. Om has written about why the purchase makes sense for Facebook, but some observers have argued that the dollar value of the deal seems almost unbelievably high — especially for a startup with no revenues and only a dozen employees. Is the acquisition another sign of an emerging tech bubble, or just a smart move by Facebook to lock up a potential competitor?

According to some estimates, the purchase price for Instagram works out to a massive $100 million per employee, which Naval Ravikant of AngelList argued should convince more startups to focus on their service rather than increasing their head-count. Developer Dustin Curtis noted that based on the acquisition price, Instagram “has generated $1,814,882 in value every day since its launch 551 days ago — that’s $1,260 per minute.” And Paul Haddad of Tapbot questioned the math behind paying an estimated $33 per user for a company with no revenues:

Ben Jacobs (among others) noted the irony that while Instagram is now worth $1-billion, photographic pioneer and technology giant Kodak is bankrupt, while others such as Dennis Berman chose a different comparison, noting that Instagram is worth more than the entire New York Times. Entrepreneur Matt Galligan, who recently sold his startup SimpleGeo, posted a photo that he said captured his feelings on hearing the news:

Many observers, including Om, argued that Facebook’s acquisition makes sense for both companies. Chris Dixon, founder of Hunch and angel investor/advisor, said that “giving up 1% of your market cap to take out biggest threat is a savvy move,” and Jon Mitchell at Read/Write Web argued that Facebook buying Instagram “makes perfect sense”:

Focusing on the size of this deal misses the point. This acquisition is an improvement to Facebook’s already-dominant photos product, and it’s a way to tie more Facebook activity to a mobile experience that, unlike Facebook’s own apps, does not suck at all.

Some congratulations, but also much criticism of Facebook

Shervin Pishevar of Menlo Ventures, among others, congratulated the team at Instagram — but Steve Cheney of GroupMe said that he was disappointed the company decided to sell. Christine Herron of Intel Capital, meanwhile, noted that the acquisition means Facebook now owns whatever photos you uploaded to Instagram, without any chance to opt out:

Many other users and observers of the deal were also skeptical, not just of the value of the acquisition but of the impact it will have on Instagram — especially for those who question Facebook’s commitment to issues like personal privacy. Buzzfeed collected some tweets from Instagram users saying they would quit the service and the Wall Street Journal also collected reader and user comments on the deal, both positive and negative. Among those who said they plan to leave Instagram as a result of the deal were Peter Rojas of gdgt and Xeni Jardin of BoingBoing.

A number of people wondered why Instagram would close a new round of financing estimated at $50 million just last week if it was working on a Facebook acquisition (Sarah Lacy says that the company was agonizing at SxSW just last month about whether to continue to build the company or accept an acquisition offer from someone like Facebook). Inside Facebook said that the deal might have been accelerated by the fact that Facebook and Instagram were already working closely on integrating Instagram’s photo sharing into Facebook’s Timeline feature.

Was Instagram bluffing, or did Facebook panic?

Christine Herron of Intel Capital noted that Instagram may have taken funding from Sequoia and others just days before the Facebook deal in order to try and drive the price higher. But Dan Primack of Fortune says that Instagram took the funding because it had no knowledge that an offer was coming from Facebook, and that Facebook panicked when it saw that a million people downloaded the Instagram Android app in a single day:

Last Tuesday, more than 1 million people download Instagram’s new Android app on its first day of availability. Facebook begins to get nervous that a social-sharing company like Instagram is able to migrate from iOS to Android so seamlessly. Then comes word that Instagram has raised $50 million in new funding from deep-pocketed investors.

For those who want to get out before Facebook takes over, The Next Web (among others) posted instructions on how to download all your photos and then delete your Instagram account, and developer Chris Thorpe of PandaWhale said that he was irritated by all the services that are being acquired based on his user-generated content. Joe Brown, editor of Gizmodo, said that he was sad about the deal because it was like “a small town getting swallowed by urban sprawl.”

Technology industry analyst Patrick Moorhead said that his 12-year-old daughter reacted badly to the Instagram acquisition, so he took a snapshot of their IM conversation:

In addition to the ones collected above, there are some more reactions to the deal from Twitter in the Storify module embedded below:

  1. Reblogged this on Hi*DeF and commented:
    Wow

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  2. I suspect Instragram’s rapid success on Android made Facebook fear that Google might jump in. Also, it would be more expensive for Facebook if Instragram kept growing and turned into a viable competitor. So the only choice was to make an offer that couldn’t be refused.

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    1. I disagree. This deal was probably long in the making, and I wouldn’t be surprised if it turns out that FaceBook “convinced” Instagram to go Android.
      Also, Instagram is no FB competitor, the functionality is way too small, and people use it fo different reasons than they use FB.
      http://scottsscripts.wordpress.com/2012/04/10/q-how-does-instagram-make-money-answered/

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  3. Amirhossein Monday, April 9, 2012

    That’s why Facebook didn’t go for IPO. Probably avoiding answering stock holders. Like the idea.

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  4. Karen Kazaryan Tuesday, April 10, 2012

    I’m certain that ~90% of value will be paid by stock options, and why not? So no, it’s not a bubble sign, they are paying for air by air.

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  5. Reblogged this on Jaggi.

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