Sunday, April 29, 2012
Website is acquiring the popular photo app Instagram
Twitter timeline has been hijacked tonight by the news that Facebook Website is acquiring the popular photo app Instagram, for approximately $1 billion in a combination of cash and Facebook Website shares. Where Marky Mark might be excited to share the news I am sitting here thinking about spoiled rich kids getting everything their little hearts desire. Instagram is big news. They started out as a photo sharing app for the iPhone in January 2011 and to date gained about 30 million users. They recently launched their Android app which I predict will see the number of users double before the end of the year. Last week they closed a $50 million funding round with the company receiving a valuation of $500 million. Today, a week later, they are set to become the property of Facebook Website. That is pretty impressive for a company with a staff complement of 17 employees. But paying $1 billion for a company valued at $500 million seems a bit desperate? Photobucket was bought by News Corp in 2007 for about $300 million. In 2005, Yahoo bought Flickr for $30 million. Did Facebook Website negotiate or did they just dish out a number to get the deal done?
The facts are that Instagram has grown at a faster rate than Facebook Website and offers users faster access to take, upload and share photos than the photo capabilities of the Facebook Website application on any mobile platform. That means that Instagram was becoming a headache for Facebook Website since it offered a better user experience. Facebook Website would probably argue that they will be able to monetise Instagram and make back the money they spend on acquiring them, but it still leaves me with a few questions. If it is about acquiring a product that offers a greater user experience, would it not have been more cost-effective to adapt the Facebook Website mobile application range to offer a similar experience? According to the Facebook Website developer blog, over 425 million users access Facebook Website via mobile each month. In my mind, upgrading your application and pushing it out towards 425 million users would be more cost-effective than spending $1 billion on 30 million users of which probably 100% already have Facebook Website accounts.
The other problem I have is that Instagram is currently a free application and as stated on their official website “are not pursuing marketing of advertising opportunities”. Facebook Website is yet to come up with a mobile advertising solution to supplement their online ad sales. Are they going to leave Instagram as a standalone application and start using it to display banner/text ads, or will they integrate the application as part of their current offering to high-end mobile users? That remains to be seen. Facebook Website is looking to go public this year with a valuation of between $75-100 billion. This means that 2012 is a very important year for Facebook Website and rocking the boat isn’t the best idea right now. Buying Instagram for $1 billion is rocking the boat in my opinion since there is no clear plan on how this will make the company – and by extention, investors – money. The only true movement is spending cash and allocating stock. It also tells me that: a) Facebook Website doesn’t have the internal talent to compete with Instagram, and b) would rather buy the competition than counter attack with their own solution.
Another question also needs to be asked and hat is whether Facebook Website was caught up in a bidding war. Were Google, Microsoft and Apple also involved, leaving Facebook Website with nothing left to do but pay up of lose out? If this was indeed the case, then I would have bigger concerns as a potential investor because that would mean that Facebook Website raised their offer in order to close the deal out of fear. Fear that a competitor snatches up Instagram and they would need to adapt with a better solution in order to keep control of where users are spending their time. Because time spent on Instagram in the hands of a competitor who could monetise it, means less time on Facebook Website. Who really knows what the true motivation behind the deals is? Where I see it as Facebook Website starting to show cracks, another might see it as Facebook Website investing in its future. In my opinion, the boat is rocking and Captain Zuckerberg and his crew haven't come up with anything ground-breaking recently - other than introducing the Facebook Website Timeline, which is actually nothing more than a visual revamp of their profile pages. As for the 17 Instagram employees and their venture funding investors, they just became instant millionaires.
Source: IT Web, South Africa