Tuesday, April 10, 2012

Why would Facebook pay $1bn for Instagram, a company with no revenue?

Just when you were getting bored about whether we’re in another tech bubble, Facebook has reopened the discussion in dramatic fashion –buying super-hot photo-sharing app Instagram for a reported $1 billion in cash and stock.
Normally the question would be “is it worth it?” But this time, few in the tech world are even asking that: they’re just a) saying it’s not, and b) predicting a mass exodus of customers who don’t want to be associated with a "big business" like Facebook (who appear in danger of becoming the Microsoft of the social age).
Instagram has been a phenomenal success recently. They only had seven people working for them at the end of last year. When they launched an Android app a few weeks ago it saw 1 million downloads in the first 24 hours.  The iPhone app already has over 27 million users. But a billion dollars? Why (and I’m not even mentioning direct revenue, as Instagram hasn’t got any)?
  1. For the talent. It is incredible that such a small team could grow a company to north of 30 million customers in just over one year. They are the first true success of the lean start-up approach. Clearly Kevin Systrom and co are a very talented bunch. But they’re not that good.
  1. For the technology. There has been speculation for a while that Facebook would launch a dedicated photo-sharing app. Photo-sharing was key to Facebook’s early growth but their mobile products have, so far, been limited.  They bought the messaging app Beluga and soon after launched their standalone Messenger app (which was very similar to Beluga). Buying a popular app is easier than building your own from scratch. But it appears from noises made by Facebook/Instagram so far that Instagram will remain a standalone app; they’ll just "increase their ties to each other".  It wouldn’t surprise me if there’s a U-turn here down the line.
  1. For the users (or rather their activity). I doubt there are many people who are Instagram users but not Facebook users (other than a few who have left Facebook in protest over the years). I don’t mean to suggest I’d buy Instagram to acquire customers for Facebook. Instead I’d buy it for the user activity. Instagram is white-hot. Back in August they were reporting one photo upload for each of their seven million users every five days. Now they’re at about 30 million users, including a few million Android users who have been chomping at the bit for months and are no doubt sharing like crazy: that's an awful lot of uploading and viewing. Facebook is an advertising platform, and to sell advertising, you have to have "eyeballs". Instagram has a lot of those, especially in core markets (US and Western Europe), where Facebook’s core product has been declining recently. Tight Open Graph integration could provide a huge boost to activity levels within Facebook.
Perhaps there’s another way to look at it. One billion dollars makes no sense. But as Facebook are paying largely in equity, the more relevant question is: if Facebook is worth £100 billion, is Instagram worth 1 per cent of that? Quite possibly – in which case, the issue is Facebook, not Instagram.

1 comment:

  1. Just shows anyone in the world can come up with an idea and get rich. Especially in this tech age.