Instagram : It Lets You Share Dirty Pictures, And It’s Worth $1 Billion

Instagram, having been first an app and then a social network, had begun to establish itself as a platform for photo sharing

So Facebook has agreed to pay a billion dollars for Instagram, the photo sharing service that artfully dirties up your camera phone pictures with quirky retro effects. It would be easy, particularly so soon after Twitter gobbled up blogging site Posterous, to do what commentators such as the Observer’s John Naughton did, and dismiss the acquisition as evidence of the emergence of another dotcom bubble.

Instagram

As Naughton pointed out, ‘Instagram has been in existence for 18 months, employs 13 people, has 30 million users and has had a grand total of $7m in investment funding. Oh, and it has precisely zero dollars in revenue.’ He could also have added that the venture capitalists who invested $50m in Instagram just a week before it was snapped up valued it at half what Facebook paid. And that in an earlier round of funding just over a year ago, it was valued at only $100m.

Zuckerberg and his fellow Facebook board members are no mugs, so why pay such a high price? It certainly wasn’t for Instagram’s only product, an attractive and popular photo effects and sharing app. Had Facebook wanted to build a similar product to, as Zuckerberg put it in a statement, ‘offer the best experiences for sharing beautiful mobile photos with people based on your interests’, it could have done so in a heartbeat, and for a lot less than ten figures?

iPhone screenshots

Put simply, Instagram was a threat to Facebook. Or, if you’ll pardon the words of GigaOm’s Om Malik: ‘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.’

Take a look at Facebook’s new Timeline display, which is currently being rolled out to its 850 million users, if you doubt Malik’s assertion about photos. Instagram, in the space of 18 months had built a user base of 30 million people, uploading five million photos a day. And that was just on iOS. An Android version released earlier this month immediately showed that the user base had the potential to grow very quickly over the next few months.

Crunching the numbers, a valuation of $1 billion for 30 million users puts the cost of acquisition at a shade over $30 per user. But it’s reasonably safe to assume the launch of the Android app wills double the user base quickly, cutting the cost of acquisition to $15 per user. That number looks pretty reasonable to anyone who’s in the business of acquiring subscription customers. Those won’t all be new users to Facebook, of course. Many will already have Facebook accounts. They may, however, be lapsed users or account holders who were in danger of drifting away from Facebook and spending their social network­ing time on Instagram instead.

Instagram, in the space of 18 months had built a user base of 30 million people, uploading five million photos a day.

Either way, $15 per head is significantly less than the $118-per-user value put on Facebook by those who think it will hit a valuation of $100bn when shares are sold to the public later this year.

And Instagram, having been first an app and then a social network, had begun to establish itself as a platform. Other photo apps on iOS now allow photos to be shared on Instagram’s website. If users started shar­ing on Instagram rather than Facebook, the latter’s attractiveness as a destination would be reduced. And there was evidence of that starting to happen. In October 2011, Insta­gram attracted fewer than 70,000 visitors a week to its site. By the first week of April 2012, the figure had risen to 3.8 million. Just as importantly, more than half of those visi­tors were under the age of 35, making them younger on average than Facebook’s, and a key demographic for Facebook’s advertisers.

Moreover, a whopping 80% of visitors to Instagram’s site arrive there directly from a social networking site. In other words, Facebook users who could be staying on that site or clicking on adverts were going to Instagram instead. Clear evidence, then, that the acquisition was a defensive move. This didn’t impress Robert Cyran, writing on financial website Breaking Views. ‘Paying over the odds for revenue-free rivals is usually the hallmark of anxious, mature firms - not a growth company seeking to go public at a $100 billion valuation,’ he wrote.

But Facebook wasn’t just defending itself against Instagram. Pinterest, another social network focused on sharing photos, already has 20 million users and is growing quickly. To defend against social networks focused on sharing photos, first one must think like a social network focused on sharing photos. Or buy a company that does.

Instagram users weren’t impressed with the acquisition either, despite Zuckerberg’s assurances that his company would keep Instagram going as an independent entity (assurances notably lacking at the time of the Posterous takeover). Many took to Twitter to decry the deal. Others pointed out that Facebook had shut down location-sharing service Gowalla three months after acquir­ing its developers. But Gowalla was never acquired outright: Facebook merely hired its founders and developers, and made no secret that Gowalla would close as a result.

Instagram users weren’t impressed with the acquisition either, despite Zuckerberg’s assurances that his company would keep Instagram going as an independent entity

There’s no need, of course, to take Zuck­erberg at his word when he says ‘we’re committed to building and growing Ins­tagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.’ But he does have a very good point about the brand, as shown by the reaction on Twitter to the acquisition.

Millions of people do indeed love Insta­gram, whether because it allows them to follow friends and comment on their photos, because it makes their shank mobile snaps look like they were taken, as Guardian car­toonist Kipper Williams put it, ‘from inside a 2000 tech bubble,’ or because of its cutesy logo and typography. There’s a value in the brand that doesn’t exist even for very good rivals like Camera+ and Hipstamatic. Besides, many Instagram users are also Facebook users, and killing the service or integrating it into Facebook wouldn’t help retain them.

Millions of people do indeed love Insta­gram, whether because it allows them to follow friends and comment on their photos

 “We plan on keeping the ability to post to other social net­works and not share your photos on Facebook if you want”

So keen is Zuckerberg to keep Instagram users on side that he’s said: ‘We plan on keeping features like the ability to post to other social networks, the ability to not share your Instagrams on Facebook if you want, and the ability to have followers and follow people separately from your friends on Facebook.’

Instagram chief executive Kevin Systrom added his own positive noises: ‘We’ll be work­ing with Facebook to evolve Instagram and build the network. We’ll continue to add new features to the product and find new ways to create a better mobile photos experience,’ he wrote in a blog post.

Systrom, who stands to make $400m and the rest of the tiny Instagram team, each of whom will become a multi­millionaire, will retain the drive and hunger of their start-up days, only time will tell.

For Facebook, the decision to splurge was ultimately a simple one: with its own stock market IPO coming later this year; it couldn’t afford not to pay a billion for Instagram.