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An analysis of Facebook Instagram Acquisition

10 April 2012 View Comments »


The news that is buzzing all around now is of Facebook's $1Bn acquisition of Instagram. While few are terming it as a bold strategic move by Facebook, many are talking of the bubble. Inspired by Dan Frommer's numerous posts at SplatF, I decided to my own version of what I think of this move by Facebook.

First things first - as Zuckerberg of Facebook and Kevin of Instagram already said, Instagram will be remain an independent entity and hence it is more of like Google's acquisition of Youtube than Google's acquisition of Doubleclick.

Should Facebook buy Instagram ?  

I would say downright that Facebook should have bought Instagram. Reasons are here:
  • Instagram has 30Million+ users . Not to forget that that number is only on iOS platform. The number is only going to explode after its recent launch on Android platform.  ( Android holds >50% of Smartphone market share and Instagram's Android app was downloaded more than a million times in 24 hours of launch  ). It is the fastest growing Mobile social network.
  • Facebook gained its popularity on web due to Photos. Though it is both photos and apps that draw more crowds to Facebook these days, the start is through photos. Instagram is a photo based mobile social network and could become a potential competitor to Facebook on mobile.
  • Every smart phone has a camera and hence photos play a much bigger role than they played on web during Facebook's initial days. You can't just ignore the most popular mobile photo social network.
  • While instagram's growth rates are astonishing, they are a super lean organization with just 13 employees. It will be super easy for Facebook to integrate Instagram's small team into Facebook.
  • Facebook is one of the most popular mobile apps but its app really is shitty. Attempts to bring out a better Facebook mobile app did not work till now. They could probably use someone from Mike and Kevin's team in planning  a better mobile app in future. ( I know it is not a talent acquisition but I think the effect of having a great mobile developer team around can always teach a lesson or two for others )
  • Mobile is going to be the future of social networking. Mobiles are more intuitive, well-equipped and accessible for social networking and hence they are going to rule the future of social networking space. Apps like Instagram and Path are going to play a major role in this change and Facebook cannot deny the reality.

Was 1Bn$ justifiable?  

While almost everyone agrees that there are all reasons why Facebook could buy Instagram, many people can't understand why Facebook paid such a huge amount of money for a startup that is earning zero revenues. Like every time, people started talking about bubble. But, there are sufficient reasons as to why Facebook, rightly, decided to pay so much of money on Instagram.

When Yahoo previously had a chance to buy Facebook for the same 1Bn$, they backed off thinking that it was too pricey. It surely was pricey at that moment, but Facebook has soon outgrown Yahoo and there was an opportunity missed for them. Now, Facebook is in a similar position now. Infact, it is even more forced to buy Instagram because it has potential to become a competitor to Facebook. Though Instagram may or may not worth a billion, they are going to lose much more if they are going to ignore it.

Secondly, Instagram has shown the ability to maintain stickiness. One of the factors that helped Facebook was the stickiness and they know the importance. In addition, Instagram is a content generator. It has 5 Million photos uploaded everyday and hence will surely be worth a lot for Facebook.

The Instagram team can help Facebook in future, in its mobile strategy and help them grow there. Mobile is the place where Facebook can gain a lot in future.

Finally, my conclusion is that the 1Bn$ might be high on the scale of valuation but Facebook is playing a safe game here and doesn't want to take risk of ignoring competition. Taking that into consideration, the valuation is justifiable.  
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