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

shabdchhap

This feels like a story built around an attention grabbing headline. Cmon they spent at least a few days pondering this purchase, and you figured out the reason within a few hours of the story breaking?

Especially with lines like “Because Facebook is essentially about photos”…

Felecia Lesser

I THINK THIS IS RIDICULOUSNESS !!! Instagram was just fine before Facebook came and had to make a mess of things!!!!! Before this happened I had no problem uploading a photo on Instagram and now like I have with facebook, I have many problems. Its not disappointing, its aggravating. Facebook ripped off Instagram off!! They were worth 300 billion dollars. And Facebook only bought them for $ 1 billion? This is just crazy. What will happen now to Instagram? Will it take the name of facebook? And will there be any changes.

roger

bullshit. just a fucking waste of resources for the human race.

Peter Miller

Wrong. Wrong. Wrong.

This was a move Microsoft would have made: buying simple software w/ a Brand name attached. It devaluates the FB Brand entirely. In the long term, decisions like this make it easy for a FB competitor to come in and take the social media pie.

Ekendra

Every business model needs another model for perfection, but are we claiming that Facebook is going to be perfect. Whatever may the future cases be, we stay and see if these integration models work well.

finanseer

Youre an idiot. Its all about the rev generation, and as far as i can tell, there is exactly ZERO revenue coming in from Instagram. Put that in your $1bn valuation and smoke it.

Sarah

Wow, this is how our “companies work”. They see a competitor and think ” ohh time to buy them out using all the money we have from selling identities and doing the same to others we buy out” ewww just no, Facebook is taking over the works ahha :p

Sarah

Hshshhaha instagram emotions??????? No half the people do shout outs all the timeto get more point less followers and oo many challenges to post things on days but no one really cares! No people are shallow and follow people just so they can get a follower….

Chris

A billion dollars for a 50 million user base… Insanity!!!!

Adame DOE

Strategic move and it’s all because of Pinterest.

Pinterest is growing so fast… knocking down Facebook on two major fails ~ : pictures’ sharing and being a well thought, efficient, interesting market place (they don’t even need to monetize their websites with boring ads).

Instagram’s acquisition is the only guarantee to slow down Pinterest’s a bit. Sure, There’s still a long way to reach Facebook users’ base, BUT, things could have been messy if it was Pinterest who got Instagram instead. Plus, they’re not using the same model… they’re not even direct competitors.

Mark Zuch. should have see the future and freaked out…

Will Facebook boost their photo sharing system? We’ll see…

I won’t be surprised if they tried to buy a market place using Pinterest’s logic. Won’t be that easy to find though.

macdsl

I’m still missing it. Facebook has a much larger user base. They could have spent 100 million creating a photo-sharing service specific to Facebook. An insane amount of money for that specific project. AND STILL SAVED 900 MILLION DOLLARS.

Robert David

Kevin Systrom & Mike Krieger started #Instagram in mid-2010. THE quickest rags-to-riches billionaire story in the history of mankind.

Jon

I closed my Facebook account. To much tracking, to much private info being exposed. Googles next!

HandFedFred

Someone make Instagram2. That would really annoy that facebook guy.

Steve

If this is true why sell out? I’d eat Facebooks lunch if I could. As a venture backed company I understand that some liquidity event was inevetible. Really surprised that FB thinks sharing photos is such a large part of their business. I really dislike the prominence of the FB/Google/Amazon business model that is undortunately becoming a norm in the tech/web realm. Essentially feels like the equivalent of some troll following you around and recording everything you do, read, eat, wear etc and then selling that info. to generate revenue.

jookyone

And you’re just now realizing this? The old adage is that if you aren’t paying for something, then the product being sold is you.

solveigwhittle

Sold too soon! I agree, but $1B (even if half is stock) is pretty tempting. The bottom line is that Instagram could have challenged Facebook directly in its space for all the reasons mentioned above, but with deeper pockets due to their IPO, Facebook would likely have figured out how to crush it some way or another. It was smart to cash in and move on. At least this way, some of the elegant Instagram technology will live on inside Facebook. I doubt the “soul and emotion” feature will survive the advertising juggernaut that Facebook corporate has become, however.

Sanjay Dua

Great insights, Om. Going forward, would be interesting to note how Facebook manages to translate Instagram into increasing ad revenue in mobile.

Srinivas Vadhri

Is “pinterest” next? Om – what is your prediction …

J D J

Great article, but still disappointed about facebook acquiring instagram. over the last couple months, i’ve become annoyed by facebook and their confusing layouts/features, I wonder what Zuckerberg would do to instagram. I can only see the app going downhill from here. Also, only an hour on instagram? That’s nothing!

Michael Patrick Lee

Very interesting. The Facebook owners seem to be leaches haha, very smart though.

Hanne

Um all I can say is Facebook better not do something to instagram cuz it WON’T be pretty(: no changes that everyone hates!

Ignite PR

Good point you raised on the prospect of Instagram selling too early. It’s such a hard call for the company at this stage. Plus the $1B price tag is indeed an offer that few could refuse. With the public markets being so mercurial and the uphill road that this young company still faced, i think it was a sound decision all things considered.

R

“Because Facebook is essentially about photos, ” wrong! Simply put Facebook is about sharing, and photos are one of the vehicles to achieve that!

Idon't Know

Time to dump Instagram if you value your personal information at all.

AC!D404

People are too ignorant to care about their personal information anymore these days. Why hasn’t anyone tied together the whole face & picture recognition projects that Facebook and Google are working on… This isn’t about business, it’s about data ownership and now Facebook has the BIGgest slice of data pie!

jookyone

They have the largest slice of generic and “public personna” pie. Facebook is a collection of people putting out what they want other people to think of them. Not truly who they are. As an earlier poster admitted “I don’t want everything on Facebook” because not everything should be in public.

Google still owns the lions share of useful data.

Greg McLaughlin

One thing I kept wondering about was how IG would start making money after the funding money ran out. I think that the staggering growth seen up until and continuing past the Android launch only would only see them burning through money even faster. I can’t fault IG for wanting going through a door that would repay the investment and make them some money at the same time. I agree, though that anyone who sees IG as just a hipster filter photo app really didn’t see the incredible social network that emerged. It is still my favorite community to belong to because these pictures offer a glimpse into someone’s life that a simple status update cannot possibly give you.

But I do feel like I was bought and sold, not unlike some customer list. I guess it had to happen at some point and it either was going to be Facebook or Google with IG’s value going up and up.

Hellooo Path…

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