Instagram gets Facebook to bite a $50 million bait
Reading reactions about the Instagram purchase by Facebook this morning (read the WSJ announcement here, Instagram’s CEO Kevin Systrom comment here), I can’t help but quickly comment. You might read this analysis elsewhere as I guess I am not the only one seeing through the logic of the price paid: $1bn. For a 2 years old, 12 people team, with no technology innovation whatsoever. Wow. Market forces at play.
Eyeballs rule
Most comments I have read so far focus on the product aspects of the acquisition: “With Instagram, Facebook is going to have a much better photo sharing app than what it has developped on its own”, or anything along the same lines.
However I believe that the real reason for such a deal is not technology or product, but eyeballs and TSO. Both on laptops and on mobile phones. At 16% (US), Facebook is a clear leader. TSO, the amount of time a user spends online within the boundaries of a given service, is one of the most strategic variables for Facebook, as it is what drives their advertising revenues. Like with old-days television. (Facebook doesn’t monetize yet their mobile app through advertising, as they say they have not figured out yet a good way to do it — most mobile advertising is too intrusive to the user experience, and drives the user away from the app in most cases. But Instagram — a fully mobile app so far — should easily transfer their experience onto the larger screens, where Facebook knows how to push ads).
Who needs technology? Virality + Stickyness + Growth
In reality, the deal today is all about the virality and stickiness of the Instagram experience which helped them secure significant mobile TSO: they have managed to built a community of users who return multiple times daily, regardless of whether they are on FB or not. They engage quickly with the service virally, and remain engaged throughout the day for months. Add rocket growth in the past few months, a sure sign that a service has gained acceptance: the Instagram user based grew 30 times in the past year, to 30 million last month. A winning formula.
Kudos for a brilliant setup
The smart move was Instagram’s when they chose to not integrate their app with Facebook last year. It must have taken balls to resist the temptation, but they made it. Because the service was growing independently of Facebook, capturing TSO and growing their user base very fast, they became a threat.
With the $50mm round they were raising at $500mm value a few days ago, they were on the path to becoming an unaffordable threat, in both senses. Facebook had one bullet, and they fired it quickly. Investors at $500mm valuation would not have agreed to selling at a small premium. Hence the offer that made the deal, at a x2 valuation: $1bn.
Instagram clearly outsmarted Facebook: their $50mm round announcement was a smartly designed, well executed bait.
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4/09 3:33pm update: On 2/29 Facebook announced their mobile advertising strategy. It has not been rolled out to everybody as I write this. Venture Beat has a good analysis here: “Facebook’s mobile ad strategy is a risk for Facebook and its advertisers (analysis)” (http://venturebeat.com/2012/02/29/facebooks-mobile-ads/)
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