Facebook announced yesterday that it has purchased mobile photography app Instagram for an astonishing $1bn. What’s CEO Mark Zuckerberg's thinking here?
Instagram launched just 18 months ago and very much zapped straight into the 20-something hipster zeitgeist - which was all things retro, especially photography. In a world where physical Polaroid cameras and film were hot again, Instagram essentially provided an instant, mobile version. Combined with its quick online sharing it became an instant online sensation.
Instagram is, in a word, cool. Facebook is losing its 'cool', rapidly.
Instagram currently sits at around 30 million users - using the Apple App Store alone. It launched the Android version last week. Its founders think it can hit 100 million. These subscriber figures aren't that relevant, as Facebook hardly needs to grow its user base - and most Instagram users are already Facebook subscribers.
Instagram has just 13 employees, has never made a profit and Facebook seems to have paid an extortionate amount of money for the company - presumably fighting a bloody bidding battle with rival Twitter (where Instagram would be a slightly better fit, given its more 'instant' format and micro-blogging style).
This acquisition is already being compared to Google's purchase of Youtube for $1.65bn in 2006. Google Video had been well and truly crushed by Youtube, and the purchase became an admittance that perhaps others were doing better in the space.
Facebook is feeling the same pinch - its mobile apps have long been clunky, slow and frustrating affairs, the company even mobile back to making its mobile product a webpage. Uploading photos in its UI has involved a step or two, too many for mobile users. Instagram is the very essence of a successful mobile app - it grew up in the app environment first and foremost. It's one touch, instant and idiot-proof.
This already looks like it's as much a recruitment drive as it is an IP drive. Facebook doesn't get mobile - yet - but that's where the internet is going.
What makes this case so interesting has been the shouting from the rooftops by endless critics of this inflating a new 'tech bubble', and potentially driving unrealistic valuations for other hot properties, such as Pinterest, Path or even Instagram rival, Hipstamatic.
Facebook CEO Mark Zuckerberg has even gone so far as to tentatively acknowledge this audience.
"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."
Zuckerberg has said he intends to keep the company running as a separate entity, rather than fold it into Facebook completely, much as Google did with Youtube.
It is the highest price ever paid for a profitless start up, outside of the aforementioned Youtube purchase.
The key fact is that Facebook (and indeed most of the web giants) still haven't cracked mobile advertising. Advertising remains Facebook and Google's major source of revenue. It took Google years to balance the ad revenue against user experience on Youtube to avoid frustrating users and produce a decent return.
However, for every Google-Youtube acquisition, there is a Myspace or Bebo story of astonishing failure and devaluation. By buying Instagram this early, Facebook may have avoided paying even more, and cut off a rival long term.
What may be more interesting is the personal politics at play here - the 'coolness factor' of the deal - this may have driven the price higher.
27 year old CEO Zuckerberg sees himself as exactly that - cool - a young, hip CEO that isn't like the rest of the stiffs in Silicon Valley - he thinks outside the box, he will change the internet, etc. etc. etc.
Google's Larry Page and Eric Schmidt grew out of this adolescent phase (hence the removal of firm motto: 'Don't Be Evil') once they had to start producing a return on investment. It is now earning 'evil empire' status (replacing Microsoft), and regularly faces privacy and monopoly probes by lawmakers around the world.
Zuckerberg is perhaps a bit wary of this same attention Facebook has been garnering, at a much quicker rate than Google did at this same stage of evolution.
Facebook membership is already showing signs of plateauing. Young users are growing wary of Zuckerberg's company gleaning their personal data to be shilled to the corporates.
Zuckerberg keeps a close association with Sean Parker, the self-styled Napster rebel (and Facebook shareholder), and even runs his press conferences like the former king of tech cool - Steve Jobs.
Is Zuckerberg trying to 'get down with the kids'?
Effectively, Zuckerberg may have been willing to pay a little more in an attempt to re-cultivate Facebook's cool cachet.
Instagram may well do that.
But whether Facebook's soon-to-shareholders will allow these kinds of personal powerplays to continue after the company's expected IPO in May will be another matter. They will want proof of an ROI on that $1bn - and that is a less than clear proposition.
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The total consideration for San Francisco-based Instagram is approximately $1 billion in a combination of cash and shares of Facebook. The transaction, which is subject to customary closing conditions, is expected to close later this quarter.