One Billion for Instagram: Facebook’s Strategic Move
by Yvonne Fu on Friday, April 20th, 2012Big acquisitions are not rare in Silicon Valley these days, but Facebook still surprised the world when it acquired Instagram for $1 billion last week.
For those who don’t know, Instagram is a mobile application that allows users to take a photo, apply a digital filter to it, and then share it on a variety of social networking services. This two-year-old company has only 13 employees and currently does not generate any revenue since the application is free on all platforms and displays no advertisements.
Now, many are beginning to suspect that Facebook has made a poor decision by purchasing a company this size so quickly for so much money. Even though Instagram boasts 35 million users, $1 billion is still twice the amount at which it is normally valued.
But the astronomical figure might not sound crazy when compared with other tech acquisitions over the years. The San Francisco Chronicle provides some stunning statistics: Skype was acquired by eBay in 2005 for $2.6 billion, working out to roughly $240 per user, while Google bought YouTube for $1.65 billion, or nearly $49 per user, and Yahoo acquired Broadcast.com for $5.7 billion at over $10,000 per user. Comparing these numbers to the Instagram acquisition, the $28 Facebook spent on each Instagram user doesn’t look insane any more.
What’s more, Instagram’s visual filters, which make photos look like old pictures found in the attic, also match the spirit of Facebook’s Timeline, a feature that is primarily concerned with nostalgia and how people interact with the past.
Om Malik, founder of the popular GigaOM tech blog, speculated that Facebook viewed Instagram not only as a great addition to its existing services but also as a chief contender. “Facebook . . . knew that for [the] first time in its life it arguably had a competitor that could not only eat its lunch, but also destroy its future prospects,” said Malik, suggesting that Instagram has done with photo sharing what Facebook had not – it hasgiven users an emotional connection to the technology.
Besides keeping Instagram independent, Facebook will likely integrate the visual filters into its own photo sharing feature and make the experience more personal. “For years, [Facebook has] focused on building the best experience for sharing photos with your friends and family. Now, we’ll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests,” Mark Zuckerburg said on his Facebook page.
For a company like Facebook, which is already generating $3.7 billion in revenue a year, information is indeed more valuable than profits. Instagram obtained 5 million Android users just six days after its launch; if that trend continues, Facebook may have made a wise move. Afterall as everyone knows, Mark Zuckerburg is undoubtedly good at turning a non-profitable popular application into a billion-dollar corporation.
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