Facebook Buying Instagram For $1 Billion Oddly Makes Sense

“Acquisition price aside, the fact that thirteen people can still frighten a massive company like Facebook says a lot about our industry.”

Zack Holman on Twitter

I was a bit surprised when I heard this morning that Instagram was bought for $1 Billion by Facebook. My initial reaction was shock that a company with no real revenue could be valued so high.

However, looking at the purchase from the long view, it oddly makes sense.

Why it makes sense

  • Instagram is hugely tied into Facebook. Instagram is an amazing application that does social integration so well it will be a case study for years on how to integrate social media into mobile. Using Facebook’s social graph with a super tight integration? Huge. Absolutely huge. It will also give Facebook users a great application to take amazing photos with. The possibilities are endless.
  • Google was probably looking into buying Instagram. If I were Google, the three platforms I would buy  right now is Pinterest, Tumblr and Instagram (all three of them having designer co-founders —  coincidence?). Facebook took one of them off the market, and might be looking to take a second, Pinterest, off the market too. Google’s asleep at the wheel, yo.
  • This is a one-time deal where Facebook was the only logical suitor. This is similar to Google’s YouTube purchase for $1.6 billion. Google was the only logical suitor in that purchase. It only makes sense that a social network like Facebook that gets so much of their content from Instagram would buy it. More importantly, they needed to keep it from someone else.
  • The acquisition cost per user cost actually isn’t that bad.    Instagram has 30 million users. When you look at the viral growth of the application (and the incredible bump in installs we’ll see because of the purchase, probably upward of another 30 million users before the sale is closed), the acquisition cost probably drop below $20 per user. Most companies would kill for this.

And the dark side

  • This is a one-time deal where Facebook was the only logical suitor.  There’s going to be a slew of mobile and other applications that will take aim at Facebook as the only company that could buy them. That means we’re going to be deluged with a lot of poorly designed applications funded by investors that don’t get it.
  • If a team of 13 can build a company for $1 billion, what does that say about the rest of us? Instagram is an amazingly elegant yet simple application that serves a very real need and has a great user experience. There are companies with hundreds of engineers that can’t generate $1 billion in market value. We’re collectively doing something wrong. Maybe Designer Fund has it right, because Instagram is yet another designer-led startup.
  • The “get users first, we’ll worry about revenue later” approach will be encouraged. For this situation, it makes sense that user acquisition was the primary goal. Now many firms will think that this should trump revenue in every situation. That’s wrong. Context matters.