Social Media

Facebook Buys Instagram for $1 Billion … But Why?

By Elisa Gabbert April 12, 2012 Posted In: Online Marketing Blog Roundup Comments: 9

Last week, waaay at the bottom of my post on the ethics of search, I included a couple of links to articles about Instagram culture. The photo-sharing app had just been made available on Android OS, which had a lot of Android users cheering and a lot of iPhone users jeering (as in, “Hey, WTF? Our exclusive little club just got a lot less exclusive…”)

That was pretty minor news compared to what happened to Instagram this week, though – it was purchased by Facebook for a whopping, unbelievable $1 Billion!

Instagram, both the company and the app, are very simple – beautifully simple, I’m sure some would say. They have a handful of employees and the app “does one thing well” – take a photo with your phone, add some fun filters to make it look cute and retro (like a Polaroid, say, or sepia-toned), then share with your friends. See how it makes even a boring picture of the inside of a refrigerator seems artsy-cool?

Instagram

Thanks to this basic appeal, the company managed to rack up 35 million users or so very quickly, despite the existence of plenty of other photo sharing apps.

So it’s a cool app with a lot of users. But why, exactly, was it worth SO MUCH to Facebook? I’ve read a lot of theories, and none of them really make sense to me. Let’s take a look.

Fear-Driven Decisions: Facebook Eats the (Potential) Competition  

Most everyone seems to agree that Zuckerberg saw Instagram as a threat. As Om Malik at Gigaom puts it:

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.

OK … wait, what? I can see that Facebook has a big hole in its functionality when it comes to mobile photo sharing. Maybe fixing this is a serious priority for the company, because people love mobile and people love sharing photos. Maybe its wants to patch that hole with a ready-made app that already has a user base and brand value. But to claim that “Facebook is essentially about photos” feels way off to me. Facebook is essentially about building a personal brand that you project to all your friends and acquaintances – and photos are a big part of that, but they’re not the whole thing. If Facebook was nothing but photos, it wouldn’t be worth as much as it is. Photos are not as valuable, qua data, as stuff like where you went to college, what you do for work, what kind of music you listen to, where you spend your weekends, what kind of shoes you buy. That information may be subtle embedded in your photos, but is it readable? How do you monetize it? (Instagram was a free app with zero revenues.)

Om really seems to have drunk the Instagram Kool-Aid, so it’s hard to take his argument entirely seriously. He says “Facebook lacks soul. Instagram is all soul and emotion.” And later, in a comment: “i spend a lot of time on it for the fact it is a magical portal into magical lives.” A magical portal into magical lives. Really? Did a 20-year veteran of tech and business news (with well over a million followers on Twitter) just call a mobile app that puts faux-vintage filters on your photos “a magical portal”? Because here’s the thing about those filters – they make your friends looks better (they’re the beer goggles of photography), they make your experiences look better, more like happy memories (already) and less like the banal, mundane reality that happened five minutes ago and is happening as we speak. But they don’t actually make your life more magical. That’s just branding. Have smart people really bought so fully into the claims of branding? Life’s just better with a white border and a Coke in your hand?  

Silvia Killingsworth in The New Yorker actually agrees with Malik:

In a blog post announcing the acquisition, Mark Zuckerberg wrote, “providing the best photo sharing experience is one reason why so many people love Facebook,” but Malik gets one step closer to the truth by saying, “Facebook is essentially about photos.”

Facebook was my go-to place for photos until I downloaded the Instagram app, ten months ago.

That second sentence doesn’t really support the first one. Facebook was her go-to place for photos – “was” is the operative word. It’s not anymore because Facebook isn’t primarily about photos. She was just using it for photos because that’s where everyone is. (To put it another way, Facebook hasn’t lost 30 million users to Instagram; Instagram users still use Facebook.) A minute I go I said Facebook is about user data (the mother lode of it), but another way to look at it is, Facebook is about ubiquity. Instagram may challenge Facebook when it comes to photo sharing, but how is it a threat to Facebook’s sheer everywhereness?

So It’s Better than Other Photo-Sharing Apps. But Is it That Much Better?

Dylan Tweney at Venture Beat tries to argue that Instagram really is worth a billion buckaroos, but makes even less sense than Om. He compares it to Path, a similar mobile app founded around the same time, but with a fraction of the user base (more like 2 million). Instagram is more successful because it appeals to our limbic systems, he says – “the primitive, reptilian part of your brain.” According to Tweney:

For the limbic system, [Miko] Matsumura told me, only three questions pertain to anything in front of you: Can I eat it? Will it eat me? Can I mate with it?

I think it’s fair to say that Instagram has a strong limbic-system trigger, appealing to the part of our brains that crave recognition and validation, and fear nonexistence and irrelevance. Path, by contrast, has a more cerebral premise.

Tweney totally contradicts himself here. He says only three questions pertain to the limbic system, then claims that Instagram appeals to that system in a completely different way. Wanting to look cool is a real motivator for humans, but it’s not a matter of life and death. You can’t, in fact, eat a jpeg, or mate with it either. He then lists a few more reasons that “Facebook bought Instagram and not Path” – which are probably valid, but he neglects to answer the question posed by his own title: Why is Instagram worth $1 billion? Just because it’s leading the pack in terms of photo sharing apps doesn’t explain that huge valuation.

A Glass of Water Is Worth More than the New York Times When You’re Dying of Thirst

Glass of WaterThere’s a really interesting discussion on Y Combinator about why Instagram is worth more than the New York Times (which The Next Web says is “a truly global brand”). The first commenter says: “A glass of water can be worth more than the New York Times if Zuckerberg is lost in the desert and you happen to have water. It can be worth even more if Larry Page is dying of thirst at the same time and starts a bidding war.”

It’s a compelling (maybe) analogy, but far from a perfect one. First of all, in what sense is Zuckerberg “lost in the desert”? Yahoo is pretty much lost in the desert, but Facebook is doing quite well in terms of revenue, active user base and pretty much any other business measure. Secondly, it’s not like Instagram is the only water in the “desert” – as mentioned above, there are plenty of similar apps out there. Third, Zuckerberg could, if he wanted to, make his own water (er, if you will) – that is to say, Instagram’s technology could easily be reproduced for A LOT less than a billion dollars. So, again: Why did Facebook pay $1 billion for it? You can’t argue that they’re buying the user base, because those 30 million people are likely already on Facebook.

Some commenters argue it’s worth it for the “brand value” – but Facebook still has way more brand value than Instagram. As one person argues, “Facebook could have done this for 100,000$, 10,000 times less then what they paid for. And they have the world's largest and most captive audience, 845 million people, they would have just needed to convince less then 4% of them to have a similar amount of users.”

Others say that Instagram must be worth that much because Mark Zuckerberg and Larry Page wouldn’t be interested in it if it wasn’t. Someone else quickly points out that this is a logical fallacy: “This sort of ‘appeal to authority’ holds very little weight in and of itself. Rich and smart people make plenty of mistakes, and are just as prone to tunnel vision as the rest of us.”

One comment that looks at it a way I haven’t seen anywhere else:

Is there a 1% chance that the enormous rate of growth of Instagram would have continued for a few more years to produce a social network the size (and profitability) of Facebook?

If so, that's a justification for Instagram being worth roughly 1% of Facebook.

Not sure I’m totally convinced, but it is interesting. This is also persuasive:

Few years ago a 2 years old startup with no revenue was acquired for almost twice what New York Times is today. Now this startup helps to bring more than $1 billion in earnings. The name of the startup is Youtube.

I don’t personally see Instagram as ever being nearly as powerful as YouTube, but, again, it’s interesting.

More on the Instagram Acquisition

Paul Ford writes soundbite after soundbite on Instagram’s “sellout.” For example: “In terms of user experience, Facebook is like an NYPD police van crashing into an IKEA, forever — a chaotic mess of products designed to burrow into every facet of your life.” And: “If Facebook is a sprawling, intertextual garden of forking pokes, Instagram is no more complex than a chapbook of poetry” (poetry reference FTW!). And: “On the web, ‘product’ has gone meta. Companies once made sleds or dreamcatchers or software, but that’s all outsourced; an Internet product is very often a thing that lets other people make things … and you can get 30 million people working for you, for free, if you do a good job of it.”

Jon Mitchell at Read Write Web says “Instagram won the lottery.” In other words, don’t build a free app in the hopes that you’ll soon be cashing out to the tune of billion$. Instagram just got very, very lucky.  

Business Insider has a bunch of articles about the acquisition. Nicholas Carlson says Instagram, not Google or Twitter, was Facebook’s biggest competitor and calls it “a brilliant move.” Gotta laugh at the first comment on this second one: “Great job getting 4 articles up on the same news event within 10 minutes!”

Dan Zak at the Washington Post says FB and Instagram “were made for each other”: “They are both tools with which we define and refine our self-images, and they both allow us to edit and filter the world as we see fit.”

Bill Chappell at NPR focuses on the user reactions. Many are exporting their photos and even quitting the service now that it’s under the aegis of Facebook (probably due to privacy concerns).

Aaron Wall says it’s “a totally reasonable price if priced on value.” But it turns out he was referring to a woman who accidentally paid $167 for peanut butter.

Over to you: Was Instagram worth the big billion? Or is Zuckerberg smoking fear-based crack?

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Comments

Thursday April 12, 2012

Sergey Rusak (not verified) Said:

13 Instagram employees will share $1 billion!!! Unbelivable.

Thursday April 12, 2012

Elisa Gabbert Said:

I think the founder got something like $400 million!

Thursday April 12, 2012

Victor Pan Said:

Yes, the founders have 40% stake in the company. They'll be joining the ranks of Facebook.

Good luck on explaining this to your shareholders, Facebook.

Thursday April 12, 2012

Larry Kim Said:

my guess is that mark zuckerberg will get some secret kick-back from the investors of instagram. it's the only explanation!

Friday April 13, 2012

Elisa Gabbert Said:

Hmmm!

Tuesday April 17, 2012

Chris Andersson (not verified) Said:

What i don't really get with this story is why FB not just put a camera app with filters and som bling into their already excisting platform.

That would have been far cheaper than buying Instagram for 1 billion.

On top of that, Instagram would have been gone in a month or two.

O well, I guess that is how it works when you have gazillions to spend.

Tuesday April 17, 2012

Elisa Gabbert Said:

Yeah, I don't get that either.

Thursday April 19, 2012

Specs (not verified) Said:

 

Instagram has more than 1 million users and this apps is very useful in facebook yet facebook were not the first to recognize this idea were not able to realize how important this idea to their existing application. So buying it is no brainer for them and one billion dollars is just only a coin compared to what the effect the instagram will bring to the facebook users.
 

Thursday August 23, 2012

Buy Likes (not verified) Said:

I'm totally agree with yout first point. It is a threat and potiential market for Facebook at the same time. Great information Elisa!

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