A Snapshot of the Facebook/Instagram Deal

POSTED BY Global Administrator
This week saw the acquisition of Instagram by Facebook. It’s not the first time I’ve written about a Facebook purchase, and despite what Mark Zuckerburg has to say about it, I’m sure it won’t be the last. The question is; what made Instagram worth $1 billion?

Certainly this question can’t be answered by commenting on Instagram revenues – it doesn’t have any, despite a user base of 30 million and growing. Facebook will need a dollar a month from them over the next few years to break even on this investment, something which looks unlikely based on Facebook’s IPO figures which suggest that ARPU on the network is around $0.35 a month. This is even more worrying when you consider that Facebook does not currently generate significant revenues from mobile.

Perhaps the purchase was an ‘acqui-hire’, after all, Zuckerburg offered Kevin Systrom a job back in 2004 after Systrom developed a service which allowed people to send large photos across the internet. However, the Instagram service is still running normally and Facebook have released a statement confirming that they are not looking to ‘assimilate’ it, meaning that Instagram employees will most likely continue working on the app despite being on the Facebook payroll. Some of the value of the business undoubtedly lies in its talented staff. They have developed a simple to use app than can make even the most awful photo look appealing by applying a few filters, but 13 employees, no matter how talented, do not justify a $1 billion price tag.

So why is Instagram worth $1 billion? The answer is that is probably isn’t to most people. But most people aren’t Facebook. What Facebook values is its massive user base – logging on frequently and viewing and clicking lucrative ads. For optimum effectiveness, Facebook need to become the ‘go-to app’ for sharing on mobile – after all, most of the content we create is now done on our mobile devices. Instagram had 30 million users sharing photos on a regular basis even though until very recently it was an iOS only app. The Android release saw more than 1 million downloads in 12 hours.

This significant user base, sharing their photos on something other than Facebook is, in my opinion, a large part of what makes Instagram so valuable. The acquisition means that these users can now be used to generate revenue for Facebook and, most importantly, not for competitors such as Google or Twitter.

Really, this acquisition is about a combination of factors including purchasing a possible giant-killer before the competition get there and acquiring talent and mobile know-how. It also ensures that when Instagram starts generating revenues, it won’t be at Facebook’s expense. While Instagram may not have been worth $1 billion to most companies or investors, it may just have been worth that much to Facebook.