April 11, 2012

Facebook pays $1 billion for Instagram.

Do you understand why?

It seems as though the main gauge of Instagram is the number of times the app has been downloaded. I've downloaded the app, but I've never used it. I got hung up at the phase where you establish an account and connect it to Facebook so it can feed off my Facebook account. I just don't feel that good about that. Maybe that's just me.

Anyway, is Facebook just capturing a predator so its competitors won't use it to undercut Facebook? What's really going on?

34 comments:

David said...

Bubble.

Christopher in MA said...

Do I understand why? No.

Do I wish I'd invented the thing so I could be bought out and live a life of ease? Yes.

rhhardin said...

When regulations abound, small companies are bought by big companies.

Small companies can't afford the compliance costs.

It's as if young Google were bought by AT&T instead of going on its own.

The combined company behaves like the larger one, instead of like an innovator.

It's yet another route to doom.

rhhardin said...

I've been on the internet forever, and haven't downloaded anything but a couple standard players and cygwin.

Dan in Philly said...

The IT development world in which we live is increasingly resembling a tournament or a lottery, where the winners at the top are rewarded on an unimaginable scale, while the vast majority of those who labor to get to the top will never make it and are compensated relatively little for their pains.

For every Istagram there are millions who develop useful and interesting apps who make nada for their toils, but the promise of striking it as rich as these guys drives the ever onward.

Question: given the choice, would you enter such a dynamic, where the chance of reward to absurdly small but if you hit that jackpot you're set forever, or would you spend your time with a more slow but steady return on your time and labor? Well, when you think about it, you actually have that choice and make it everyday.

MadisonMan said...

Looking for the next hottest thing. And gambling with a lot of money.

Zach said...

I've read that pictures are one of the main drivers of the length of time people spend on Facebook (and thus, their exposere to ads). Also, Google Plus, their biggest competitor, has very good integration with Picasa. So the desire to have good photo integration is very understandable.

Why it costs a billion dollars to do that, I have no idea.

Lem said...

Never heard of it before.

I take it Instagram is yet another way of reaching out and touching someone?

There are already too many ways of doing that..

robinintn said...

Also, if you were thinking of buying in at Facebook's IPO, this is a clue as to how they do business. The clue says to me that they will be difficult to predict.

MaggotAtBroad&Wall said...

I heard Instagram closed a venture capital round that valued the company at $500 million about 3 days before Facebook swooped in and offered $1 billion. The VCs doubled their money in 3 days. The story also said that Instagram has 13 employees and has never generated $1 in revenue - let alone profit.

Somebody may be able to explain the strategic rationale for putting Facebook and Instagram together, but I don't think anybody can logically explain a $1 billion valuation without relying on a whole bunch of long-term fanciful assumptions that may never materialize.

I remember seeing a video clip not long ago in which Zuckerberg himself explains that he had no idea what Facebook was worth - so how does he know if he's overpaying for Instagram? But since Facebook is expected to have a $100 billion valuation when it IPOs, paying $1 billion is almost an immaterial rounding error.

Mike said...

I got hung up at the phase where you establish an account and connect it to Facebook so it can feed off my Facebook account. I just don't feel that good about that. Maybe that's just me.

Not just you, me too. Although I'll probably link it up to my Twitter account. Facebook already has too much of me.

Quayle said...

Here's my guess as to what is going on.

The game is you have to keep the eyes on your pages.

Instagram was intruding on the 'picture capture and upload to Facebook' functional component.

Facebook will do anything to keep itself from being just the glue - just the social network backbone.

They want the eyes as well as the people. They want to own the functional components that put stuff on Facebook, and the functional components that retrieve/view it on Facebook.

But just a guess.

LarsPorsena said...

Question: given the choice, would you enter such a dynamic, where the chance of reward to absurdly small but if you hit that jackpot you're set forever, or would you spend your time with a more slow but steady return on your time and labor? Well, when you think about it, you actually have that choice and make it everyday.
_______________________________

The same reason men still go gold prospecting.........dreams of El Dorado

ndspinelli said...

This post is Oliver Stonish

Geoff Matthews said...

This tells me that facebook stock is over-valued. They didn't pay cash for this, they paid in stock. If you think you're worth $100b, who cares?

Michael said...

Ah, the free market! Imagine, if you will, the riches available to the entrepeneurs who solve the battery/storage dilemma which will free solar and wind to actually be a cheap and valuable commodity. They are toiling away and one day the sword will be pulled from the stone. Without the need of an "investment" by the govt. Our idiot Republican candidate McCain wanted to entice inventors with a one hundred million dollar reward for the group successfully developing a compact storage syatem that would drive a car four hundred miles or some such. The market will reward the feat with a thousand times a thousand that amount.

Bob_R said...

I don't know if it really makes sense in the long run, but from FB's position they get complete control of all patents and copyrights, they get all the Instagram employees working directly for their bottom line rather than Instagram's, and yes they keep the technology away from competitors.

Rusty said...

MadisonMan said...
Looking for the next hottest thing. And gambling with a lot of money.


Yep. And that's OK because none of it is mine. The big plus for everyone is that there is a new billionaire who will spend millions like water for the first couple of years.He will have made a bunch of other people millionaires. Maybe start a couple of new companies and employ a bunch more people. And it didn't cost the taxpayers a fucking thing.

Jacques Cuze said...

Facebook had no choice but to buy Instagram based on the number of downloads.

WHAT IS THE NUMBER ONE FEATURE OF FACEBOOK?

Photo sharing.

So what happens to Facebook if they don't buy Instagram and then Instagram offers status updates?

Add to that that people love Instagram and people hate facebook (even if they love photo sharing).

What do people already use Instagram for that even Google+ is used for by most people? Photo sharing.

What happens to Facebook when Twitter buys Instagram?

All of this is confirmed by asking, why were you uneasy about connecting Instagram to Facebook?

Everyone hates Facebook, and Facebook understands as soon as there is a viable competitor, they are MySpace.

Jacques Cuze said...

The Relative Sizes of the World’s Largest Photo Libraries

Facebook is by far the world’s largest photo service, but how does its massive image collection compare with other website and photo libraries? 1000memories created this interesting graphic showing the relative sizes of the world’s largest photo libraries.

Jacques Cuze said...

Ugh. Instead of:

"What do people already use Instagram for that even Google+ is used for by most people? Photo sharing."

Try:

"People use Instagram for photo sharing. People that use Google+ seem to use Google+ for blogging."

Or Try:

insert something intelligent here

Blue@9 said...

Facebook had no choice but to buy Instagram based on the number of downloads.

WHAT IS THE NUMBER ONE FEATURE OF FACEBOOK?

Photo sharing.


This.

Also, Facebook has no intention of remaining "just" a social-networking site, any more than Google wanted to remain "just" a search engine. It's why Google bought Youtube. I'm guessing Google has tried to buy Facebook many times over. I'm sure Facebook has tried to buy Twitter many times over.

Instagram not only does image sharing and distribution well, but it does it well on mobile platforms, and that's where the future lies. It doesn't matter if Instagram has never made a penny--it has tremendous numbers that can eventually be leveraged into ad revenue.

Peter said...

I don't know if Instagram is worth $1Billion. But it surely is worth more to Facebook than it ever was to Instagram, because Facebook will find a way to monetize it (probably by selling information about whoever's uploading or downloading the photos).

In any case, Facebook's biggest worry has to be that something will come along that steals their users and thus makes Facebook obsolete and worthless.

In any case, they've surely got plenty of cash and can afford to spend it on risky acquisitions.

Revenant said...

It sounds crazy to me, but hey -- its their money.

Bryan C said...

There are lots of photo sharing apps that do what Instagram does, some better. Given the price they were willing to pay, it's clear that FB really wanted the name, the user base, and the audience. Instagram has developed a very devoted following, a large pool of engaged, creative, and relatively influential social-media users and consumers, many of which can likely be converted into active Facebook mobile users.

Sigivald said...

Do you understand why?

No.

Nobody outside of Facebook seems to, and the people running Facebook aren't explaining.

(On the other hand, I see no way in which Instagram is a competitor - or possible competitor - to Facebook, in their hands or anyone else's.

A notional potential value-add somehow, yes.

A "replacement" or "killer", not remotely.)

Contra Zach, who has an excellent hypothesis at the top level, FB already has perfectly good photo integration as such, and if they merely wanted to improve mobile integration they could have done so literally a thousand times cheaper by making their own photo app.

Instagram's historical strength, such as it is, is that it has a really popular iPhone app with stupid filters ... and it has no interface apart from the app.

It's not an equivalent to Picasa - if it was that that FB was after, they'd have made a bid to buy Flickr from Yahoo or something like that.

That's also what leaves their desire to blow a billion dollars in stock and cash on Instagram - which has never had a dollar in income, as far as I can tell.)

Sigivald said...

Jacques said: Facebook had no choice but to buy Instagram based on the number of downloads.

WHAT IS THE NUMBER ONE FEATURE OF FACEBOOK?

Photo sharing.

So what happens to Facebook if they don't buy Instagram and then Instagram offers status updates?


Easy. Nothing.

Instagram with statuses is still bullshit.

Guess what percentage of Facebook users have never used Instagram and never will?

I don't know - but it's gotta be over 50%, and probably more like 95%.

Instagram has a huge number of downloads and initial accounts, mostly on iOS.

What it doesn't have is a dedicated userbase that would ever desire to be isolated to Instagram.

Also, source for the idea that Facebook's "number one feature"* is "photo sharing"?


* Number one... how? In terms of user preference?

I can believe it might be the top thing that gets people to spend time on the site... but I also won't believe that it's more than a percentage point or two above other features, like games.

Does that mean "Facebook must buy all popular games to keep them from adding status updates"? No.

It's an ecosystem. It's not under threat from any One Competing Feature Plus Statuses.

Hell, even Google couldn't steal many users with an entire more-or-less-competitive social network.

And you think they couldn't avoid buying Instagram because it would kill them if it added status updates?

Please.)

Blue@9 said...


So what happens to Facebook if they don't buy Instagram and then Instagram offers status updates?

Easy. Nothing.


Wrong. Someone else would buy Instagram, probably Google.

Nobody outside of Facebook seems to, and the people running Facebook aren't explaining.

I think it's only you. People who follow tech issues understand why Facebook bought them; the only question is why they paid so much.

Alex said...

Imagine that money went to green energy research instead of another stupid web app.

Alex said...

Blue - it's the same reason Microsoft overpaid for Skype. They were not worth $8.5 billion, but they did it to keep Google from it. Of course Google is not above overpaying $12.5 billion for Morotola Mobility.

Blue@9 said...

Imagine that money went to green energy research instead of another stupid web app.

I imagine that it would have, if Facebook or Apple had any confidence in it. But of course it's always easy to say what money should be spent on when it's not your money. When it is your money you tend to use more discretion. BTW, how much private investment would you estimate is not being spent on green energy research simply because private investors assume that the gov't is going to fund and own it?

Rusty said...

Alex said...
Imagine that money went to green energy research instead of another stupid web app.


You have no idea how this 'market' thing works, do you?
Imagine he does what he damn well pleases with it.
Bussybody.

Joe said...

Because it can.

This is actually fairly common with extremely wealthy companies. They become entranced with process and to believe in their own infallibility.

Fast grown companies also start to panic when they confront reality. Making a new Facebook isn't hard, so they need to do something different. In an ironic twist, management convinces themselves that their own employees are worthless and that they must buy, or partner with, another company. It rarely works. (One of the dark secrets of corporations is that mergers fail more often than not.)

Even the lowly company where I work, years ago bought a real turkey of a company with a good idea, but no clue what they were doing.

In the case of Facebook, they could have developed this technology for a miniscule fraction of the cost (I even know the engineers they could have hired; they could have done the whole thing for less than $250,000. I'll guarantee Facebook has the skill set in house. It is a slap in the face of every engineer they have. In two years or so, Facebook will announce a massive write-down for this turkey of a purchase.

Der Hahn said...

I maintain a presence on facebook and as far as I can tell Quayle upthread has the right idea. FB is free to users so their money stream is selling eyeballs on ads. Virtually every change they have made to their UI over the time I've had an account has made it easier for ad sponsors to push content that shows up on your page in preference to 'free content' from other users.