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BLOG: Why Facebook bought Instagram for a billion dollars

Lex Friedman | April 11, 2012
When news broke Monday regarding Facebook's eye-popping US$1 billion acquisition of mobile photo sharing network Instagram, I experienced a variety of immediate reactions:

When news broke Monday regarding Facebook's eye-popping $1 billion acquisition of mobile photo sharing network Instagram, I experienced a variety of immediate reactions:

  • Wow, that's a lot of money!
  • I mean, a lot of money!
  • Is there some way I am entitled to any of that money?
  • I mean, I take a lot of photos of my kids on Instagram.
  • But wait a second: Why is Instagram worth so much money to Facebook?

What does Facebook get for its billion smackers, anyway?

By the (other) numbers

Instagram reported it had more than 30 million members before its launch on Android earlier in April. (Instagram said that in its first few days of release for Android, the app was installed more than a million times per day.) Instagram's users snap and share several million of photos every single day.

Facebook, on the other hand, projects that it will approach 900 million active members by the end of the year. Two years ago, the social network reported that its users upload more than 100 million photos per day; that's insane, and that's an old statistic. The number today is undoubtedly substantially higher.

Instagram's team consists of just 13 employees, and the technology behind the photo-sharing network isn't especially complex.

Oh, and if you had a billion dollars for every buck Instagram earned up until it was acquired by Facebook, you'd have exactly zero dollars: Instagram, as yet, has no business model and no revenue.

Those facts combined show me that this wasn't a profit-based acquisition, a talent acquisition, or even an audience acquisition: Facebook employs more than 3000 people, and Instagram's own network is roughly three percent the size of Facebook's.

Is it all about growth potential?

Facebook's current and future dominance seems fairly assured. It is both enormous and enormously popular. But once it reaches a billion members and beyond, how much more can it grow? The planet has about seven billion people; some percentage of those folks will never register for Facebook for all sorts of reasons.

Instagram's 30-plus million members are, comparatively, a drop in the bucket. In terms of membership growth potential, though, Instagram may well have the upper hand: If we posit that 2 billion world citizens are potential Instagram and Facebook members, Instagram can still register nearly all of them; Facebook can sign up just more than half.

Of course, that's a bit of a silly statistic. Facebook has its hundreds of millions of members, and most show no signs of abandoning the network any time soon. Growth potential is nice, but actual membership matters a lot more. Facebook wouldn't presume that a burgeoning network with just, say, ten members would be an even better buy because of its still larger potential growth.


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