There are a bunch of reasons why the pundits will claim this acquisition is a brilliant move, but it wasn't. Interesting yes, but at $1 billion, Facebook paid way too much. Too much in terms of value, but it doesn't matter--what's a billion between friends?
The brilliant Mark Zuckerberg himself wrote that acquiring Instagram is "the first time we've ever acquired a product and company with so many users." It wasn't Facebook's first such opportunity--it could have bought Twitter or Skype, for example. Twitter, Skype and Instagram are similar in that they all offer a new form of social interaction. Skype and Instagram both sold for very high valuations largely thanks to their large, non-paying user bases. It was not their employee base, revenues, investment, or intellectual property, but users that were key to their valuations.
When Microsoft bought Skype, there was a lot more of "they paid too much" in the chorus--most of which has died down. WIth Instagram, there is some of that, and it's going to increase.
Om Malik summed it up nicely:
They [Instagram] are growing like mad on mobile, and Facebook's mobile platform (including its app) is mediocre at best. Why? Facebook is not a mobile-first company and they don't think from the mobile-first perspective. Facebook's internal ideology is that of a desktop-centric Internet company.
With the Instagram acquisition, Zuckerberg took out a threat, and simultaneously jump starts his company for the mobile revolution already in progress. That seems pretty sound--except that it cost him $1 billion.
Does anyone else fear a mobile/cloud bust approaching? Instagram's rumored valuation was hovering around half its final price tag, and was at $100 million a year ago. The company has less than a dozen employees, and is less than two years old. Its primary product is the sharing of nostalgic square photos reminiscent of Kodak Instamatic and Polaroid cameras. There is no key intellectual property associated with making nostalgic photos. It's been highly successful recruiting users--but is far from alone in this sector.
There is certainly logic to the deal. The only concern is the price--but clearly Facebook can afford it, and if that's how Mark wants to spend cash he's entitled to. A year from now, the story will be Facebook's dominance in picture sharing and maybe even a far more respected mobile experience in general. The transaction will be a footnote in Facebook's annual report.
Facebook could have got that same result internally for a lot less. Yes, there's the risk that Instagram could end up in the wrong hands, but keep things in perspective: it's a free photo sharing app.
The story here isn't about photos, cameras, revenues, or profits. It's about mobile/cloud valuations and a gold rush. That's clearly an exciting story, but also a precursor to the stories of economic correction soon to follow.
Back to Skype: How Microsoft will benefit from its investment was not, and is not perfectly clear. But Microsoft (and the communications sector as a whole) is focused on real time communications and collaboration--including voice, video, IM, and content sharing. UC&C interoperability issues made Skype's large user base even more valuable. Instagram shares photos via email and web pages. The user base is not nearly as valuable since interoperability issues are minor to nonexistent.
Congratulations to Instagram--Barnum would be proud.
Dave Michels is a contributing editor and independent analyst at TalkingPointz.com
