Here is why Facebook bought Instagram

189 Comments

You might have heard by now that [company]Facebook[/company] 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.

189 Comments

aepxc

The biggest reason for which I loved Instagram was that it was light, simple, and with a single purpose. Now it isn’t.

There’s no shortage of ways to take filter/effect photos and upload them to Facebook. Now Instagram is just one more of them.

I am uninstalling the app and will wait and see what Facebook does with it before deciding whether to return or not. I strongly suspect that I will not be the only one.

To me, this actually reveals a bit of a strategic blindness at Facebook – one of the features that can drive competing social networks (especially narrowly-focused ‘social networks’ – social platforms?) to great success is their lack of forced integration with Facebook. It’s the ability to have more than clearly distinct facet to one’s digital identity. The blindness mostly applies, of course, if Facebook’s goal is to acquire Instagram with the hopes of retaining and growing Instagram’s current positioning. If it just wanted to kill a powerful competitor, it probably just did so pretty well.

Jason O'Keefe

I have to agree with that idea, the “non-forced” integration to Facebook as a selling point. Not everyone wants everything on Facebook – at all. And, I’m sure Instagram won’t become the ghost town that Google + is, why? Because my mom is on Facebook, my mom is not on Instagram, which tells me while Instagram has a big community, it’s not the winner just yet.

Tom Foremski

As it moves towards its IPO Facebook has to show it continues to have momentum on the user numbers and engagement. $1bn is not much insurance to pay to muddy the waters and to hide any possibly damaging churn in its numbers.

Jason O'Keefe

Just look at Apple’s App Store: Camera + and Camera Awesome are arguably better cameras apps and filters that needed community, but then Mobli came along and started eating Instragram’s lunch with it’s fast growing community/social features (all three camera and camera social apps were featured in the App Store). What I’m saying is, Instagram was smart to sell now, the competition is nipping at its heels among the early adopters and influencers.

Jason O'Keefe

After using both, Instagram has a bigger community, but Mobli does integration and feeds better – at least for my needs. The point being, competition was building so IG was smart to sell now.

Corey

Doesn’t this whole post ignore the fact that, for the vast majority of people, Instagram wasn’t a real “social network” but simply a way to take pictures with a sepia filter? Pictures that they then, of course, shared on Facebook?

This will be a punchline in a few years. Guaranteed.

Om Malik

Corey

How much time have you spent on Instagram? If you have then you very well know that is not just a filter/photo app as you are describing. I think there is a massive difference in how folks interact with photos and build social experience around them and what is a classic social network like Facebook.

Sara Conrad

Depending on how it turns out, I may stick with using Instagram or I might dump it. I don’t post that many to FB as it’s my least liked social networking site and if they make the default to automatically post to FB..well, nail in the coffin for me. FB is not where the cool kids play, great for pages etc, target audience but.. but no.

FMU

Anyone think this deal will push Pinterest into the arms of a deep-pocked suitor?

Victor White

Om, I’m not quite clear on the distinction you’re making here: “It has created a platform built on emotion. It created not a social network, but instead built a beautiful social platform of shared experiences.” Couldn’t you say that Facebook is also a social platform of shared experiences? Conversely, couldn’t you categorize Instagram as a social network?

Om Malik

Victor

Working on a follow up post about why Social Network is a limiting way to think about these new services.

HD

I can’t believe Google let FB take away this important mobile property.

jookyone

Probably because they have their own mobile ecosystem, their own mobile OS, and a thousand mobile app developers already… but that’s just a guess.

Robert Scoble

I disagree. http://www.quora.com/Instagram/What-about-Instagram-made-it-worth-a-1B-acquisition-by-Facebook is my answer. Printed here too:

Facebook has a problem. After its IPO completes it needs many quarters of strong revenue and profit growth to report to convince investors to stay put and convince new ones to buy the stock.

Zuckerberg is aiming at turning the $80 to $100 billion valuation that will happen at IPO into a $500 billion to $1 trillion company. How will he do that?

Look at mobile. That’s what.

Today Facebook has NO revenues from mobile. None. That’s amazing, since so many people, hundreds of millions of us, use Facebook on mobile clients.

That will change very quickly after the IPO. Instagram will play a huge role here, plus Facebook gets a very talented mobile development team that has built world-leading mobile apps on iOS and Android (which got a million users in its first day).

Let’s say that Facebook can turn on monetization on mobile clients. That could mean $500 million in revenue on first quarter, $700 on second, $900-$1 billion on third. Looking at it this way paying a billion for Instagram makes a LOT of sense.

Especially when you consider that the mobile team Facebook just acquired is going to be able to build a range of apps.

But that’s just the beginning. Remember, Facebook is a new media company: one where the media comes to you based on what it knows about you.

Instagram adds some important new pieces of data to the Facebook databases:

1. It knows who you like seeing photos from. That gets Facebook a dramatically better photo “graph.” That keeps it ahead of Google+, which wooed photographers strongly in its first seven months on the market.

2. It knows where you are when you shoot the photo. That is very important info for Facebook to know about you.

3. It shows a range of passions that you have. If you are a skiier, you take pictures of snow and skiing. If you are a foodie you take pictures of food at high-end restaurants. If you are into quilting, a lot of your photos will be of that. If you are into mountain biking, the same. Facebook’s databases need this info to optimize the media it will bring to you. This data is WORTH SHITLOADS! Imagine you’re a ski resort and want to react skiiers, Instagram will give them a new way to do that, all while being far more targeted than Facebook otherwise could be.

4. Instagram will let Facebook develop a new kind of Open Graph advertising. One where Facebook will be able to offer mobile developers a lot of money in return for opening their apps up to Open Graph. Venture Capitalists in Silicon Valley are slobbering over this new potential revenue stream, so having lots of VC buyin (they just got a nice payday) will be very important. Imagine that Benchmark now “asks” all of its member companies to support such a new advertising scheme? This could result in billions of revenues for Facebook and member companies.

And, there are probably a few more things elsewhere that this acquisition will do for Facebook.

Marketman

I disagree with your disagreement: I don’t believe this acquisition was fueled by a concern for generating mobile revenue.

1. Instagram has not shown any knack for monetizing their usage
2. If Instagram and Facebook user-bases overlap considerably (I’m assuming they do), Facebook is not gaining significant incremental data from this newly acquired “photo graph.”
3. You really don’t think that with all the cash Facebook has and will have after the IPO they can’t hire talent to create a photo-sharing mobile experience like what the handful of employees at Instragram created?

My assessment of this move was for Facebook to 1) Weed out their biggest threat, 2) To show investors, present and future, that they’re in-it-to-win-it, and 3) Show the world that they’re still “hip”

Lisa

Facebook has crappy photo upload and share from mobile (and the FB apps don’t help). Instagram cracked mobile.

Qasim Virjee

It will be fascinating to see what happens over the coming months;

– Will Facebook will try to integrate Instagram’s userbase and functionality into its own platform or keep it as an independent property and try to bring non-Facebook users over to Facebook through basic things like unified login?
– Will Facebook kill the independent brand identity of Instagram, likely loosing users in the process?
– What will be the user fallout resulting from Instagram users not wanting their photos to be owned by Facebook (or general discontent with Facebook itself) and how will this affect other social photo apps’ user-base growth?

With a price of nearly $1billion it almost feels like the momentum Instagram has for capturing new users has been priced by Facebook as far more valuable than the marketshare it expects competitor apps/services to own and conceivably gain in the next little while.

q./

imurphy

I don’t “get” Instagram or dedicated photo sharing apps. I even avoid following people on G+ that only post re photos.
Good post but flabbergasted by that purchase price.

Kevin Selhi

I think of this like the moment when Google acquired YouTube. FB is getting content, users, technology, and talent. The price is about right. I think Google probably got more value in paying $1.65b for YouTube, but times and prices have changed. Instagram is definitely one of the best mobile apps in the world right now, and will probably prove worth the price.

Leather & Porridge

Great article! You bring out a lot of key points. Facebook had to go after Instagram. They pretty much had no choice. I love instagram, and what I loved most about it (oh no I’m already using love as a past tense) was it’s exclusivity. FB is a platform for a heaping amount of craziness … I’m really hoping Instagram doesn’t fall prey to that.

Mason

It’s always easy to second-guess a deal. Easy to say after the fact “They could have got more”. Personally I think the valuation is way overblown. Seems like a symptom of the current bubble.

IndianF1Fan

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

Kiah Duncan

Great move by Facebook…. Eating up the competition

A S

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”.

nikolaus heger

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.

Ivan Dwyer

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 :/

San Diego Fiber

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.

Venkatesh Sridhar

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

Nicolas

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.

J Rojas

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

nikolaus heger

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….

Bob Armour

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?

Rakshith

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

007KC

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

Michael Clarke

‘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.

James S

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.

Andrew Chalkley

$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.

Jon

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

Matt

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.

d

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.

ronald

“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.”

Sudhanshu Saxena

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 ?

Om Malik

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.

Sudhanshu Saxena

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 ?

Dody Luhansa

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.

Yoav Degani

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.

Marshall Kirkpatrick

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

J Nicholas Gross

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.

Om Malik

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.

Julio Franco

“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.

Kip Martin

“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!

Dazzling DewDrops

could u explain about the features in instagram!!!

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