The Significance of the Instagram Acquisition

[Originally authored as a private post in late April 2012.]

Like everyone in consumer technology, I too am fascinated by Facebook’s acquisition of Instagram, but for slightly different reasons. While most of the coverage, ranging from tech blogs to the mainstream press, has focused on the incredibly meteoric rise of the target property (and rightfully so), I cannot stop thinking about how sweet of a deal the acquirer negotiated to gobble up the hottest, most strategic mobile property.

In purchasing Instagram, Facebook now owns the most social mobile application with 27m+ imprints on Apple’s iOS devices and perhaps just as many on Google’s Android handsets by years end. Put another way, not only does Facebook begin to diversify its holdings by purchasing the only property that could have posed any challenge, but it also now the *owner* of the most strategic application on devices run by its two closest competitors, Apple and Google. (I’d always assumed Apple would purchase Instagram because it couldn’t afford to have a competitor own it, given all the data the app collects when people use it.) So, while the blogosphere and mass media fixate on the astonishing value created by such a small team in such a compressed period of time — and it is astonishing — Facebook scooped up Instagram at a bargain price.

Let’s briefly revisit what happens every time an Instagram is created. The application briefly grabs the user’s location (implicitly), along with network information related to where the photograph is sent to. This is where Facebook’s deal gets even sweeter, if you can believe it. The majority of Instagrams seem to be shared via Twitter (or through Tumblr, then Twitter, etc.), where Instagram uses “[email protected]” handles similar to those on Twitter for tagging people in posts and comments. Now, Facebook has access to this data as well on Twitter, another competitor in social although at a smaller scale. (Some commented that Twitter was a more natural acquisition fit than Facebook, but Twitter doesn’t have the cash or ability to give stock in order to acquire a property like this.) Facebook now owns pictures that get spread through Twitter and all the corresponding @ user handles, and they are able to graph out all the (a)symmetric relationships around those pictures that occur *outside* its own network.

There’s more. The available pool of world-class iOS developers could probably fit inside the dimensions of an American football field. The demand for this specific talent is so intense that companies like Google, for instance, will spend millions of dollars per hire in acquisitions to obtain this skill set, or even offer hundreds of millions to acquire teams focused exclusively on mobile. Although Facebook’s own user base affords it massive mobile distribution across platforms, most people recognize the core problems with their mobile user experience. Simply put, aside from Facebook’s standalone “Messenger” app, their native application is terrible — Messenger isn’t their own creation, but rather another acquisition (Beluga).

With Instagram, however, Facebook paid multiples on the market price for this talent alone, but they also acquired a team that focused on building native software for the most important and the most social hardware piece of the mobile phone — the camera. The software used to manipulate images captured by a phone’s camera exists elsewhere in other apps, some with even deeper technical features. The Instagram team not only makes lightening fast iOS software, but they develop cross-platform on Android, integrate user-generated content into other readers such as Flipboard, and simplified the user interfaces for everyday mobile phone users to preview images and manipulate them post-capture with ease.

In conclusion, my assessment is that Facebook’s acquisition of Instagram will go down as one of the smartest business deals Mark Zuckerberg has ever made. While everyone still can’t figure out how a team of 13 built a billion dollars of value in less than two years, the real story is that by investing — not just spending — a mere 1% of its current value, Facebook has added an extremely sophisticated engineering team, millions of users, a playfully simple brand, and the most strategic mobile property to its portfolio, all for what may seem like a lot of money but which is, in reality, a steal.