Why Facebook plunked down $1 billion to buy Instagram

Facebook needs Instagram, but Instagram wins too. The photo power play offers several strategic and tactical benefits.

Rafe Needleman Former Editor at Large
Rafe Needleman reviews mobile apps and products for fun, and picks startups apart when he gets bored. He has evaluated thousands of new companies, most of which have since gone out of business.
Rafe Needleman
4 min read

Facebook, the largest photo-sharing site (and social network), announced today that it's buying Instagram, the wildly popular mobile photo-sharing app for smartphones. Quick analysis pegs this as a very strong tactical and strategic move for Facebook.

The key win for Facebook here is mobile engagement. Instagram has rocketed to 30 million users in under two years. Facebook has had a mobile app for years but it doesn't have the user love that Instagram does. By acquiring the best-of-breed mobile app -- at least in terms of audience development -- Facebook both takes out a future competitor and grows its mobile presence.

Instagram may be a small company, but it was, until today, a threat to Facebook. While the social network has become the largest photo-sharing site -- with about 250 million photos uploaded per day -- it could not rest on its social user base to keep growing this position. Apps like Instagram, which allow sharing to Facebook as well as other services, have the potential to win over their own social network users who generate photo-sharing traffic (uploads, discussions, and social gestures or "likes") exclusive of Facebook, which thrives on growing its user engagement metrics and store of data about its users.

In addition, Instagram has visions of video sharing. CEO and cofounder Kevin Systrom told Business Insider, "I don't want people getting stuck with the idea that Instagram is a photo-sharing company. Instagram is a media company. I think we're about visual media. I explain ourselves as a disruptive entertainment platform that enables communication through visual media. I don't think it's just photos."

But Instagram also needed Facebook. While popular, the company had yet to announce a revenue strategy. The app has been free and carries no advertising. But running a media service at scale -- and Instagram definitely has scale -- can be an expensive proposition.

While Facebook may well leave Instagram alone as a product, as the two companies have stated, it's a safe bet that the data from Instagram users will feed into the Facebook machine. Information from Instagram photos (time and location) could easily be merged with data from Facebook (who else was with you when you took your photo, and are they your friends?) to give Facebook even more tools for targeting. While Instagram currently can share photos out to Facebook, the company doesn't have access to this core information from Facebook.

Does Facebook really need better targeting for its ad platform? Possibly not -- it's already quite good. But what Facebook likely could not abide was this level of information going to a competitor. By wrapping up Instagram's users, Facebook ends up (it hopes) owning the lion's share of social information about mobile photos.

The billion-dollar transaction shows that Instagram had the power in this negotiation, and more than one suitor. The company only last week raised $50 million at a $500 million valuation. The 2x premium that Facebook paid over this indicates that Facebook may have locked in a bidding war for the startup. Other companies that could have used Instagram's focus and user base include Google, Apple, Microsoft, and Yahoo, although that last company would have had a hard time justifying a big buy in light of its current restructuring.

Several Silicon Valley companies are going to be feeling this acquisition, and few in a good way. They include:

Twitter. Instagram was the Twitter of photo sharing. The two services fit together nicely. Instagram was born for mobile devices, and Twitter has become, thanks to several good apps, a mobile-friendly service for both contributors and readers. Instgram CEO Kevin Systrom said that "Instagram is not going away," but its equal treatment so far of Facebook and Twitter, may well be.

Yahoo. Yahoo stands to lose the most from the rise of Instagram and its incorporation into Facebook. Yahoo's Flickr photo-sharing service, once the most influential photo site -- so much so that it replaced Yahoo's house-built photo service -- has not made the transition well to mobile. It doesn't have the fans or the social juice.

Google. Google has a strong photo service, Picasa, but its position among photo users is muddy. It's been blended in to the Google+ service (and vice versa), and while the combination has made for a critical success among photo enthusiasts, as a mobile photo sharing and viewing service, Google has very little presence.

Path. Path may thrive as the limited social network, but one of its core functions -- taking photos with filters and then sharing them to Facebook -- will be severely challenged by a combined Instrgram/Facebook product that does essentially the same thing.

Last Updated: 3:45 PM PT