Why did Facebook buy Instagram for $1bn?

Facebook buys Instagram by WSJ on Instgram

Facebook’s acquisition of Instagram for $1 billion on Monday took a lot of people by surprise. There’s usually rumours and conjecture surrounding such deals but this one seemed to come out of the blue.

As an Instagram fan I’ve taken quite an interest in this story. Whilst I’m not feeling particularly worried about the acquisition in the short-term, I am nevertheless feeling a mixture of apprehension and curiosity as to what Facebook has in store for Instagram.

Like many observers, I was a little shocked by the $1 billion valuation. Sure, Instagram has been growing rapidly (especially so after it became available on Android as well as iOS) and it’s a very popular, trendy application. But a BILLION DOLLARS?

However, it can be said that that a company is worth whatever someone is prepared to pay for it so here are some of my thoughts on the possible reasons behind the lofty price tag:

Staying ahead of the competition

In many ways, the acquisition of Instagram can be seen as a defensive strategy by Facebook.

Android users have been able to automatically upload their photos from their phones to Google+ for a while now and as a result Google’s social network has become very popular amongst photography lovers.

Buying Instagram could have been a good move for Google but Facebook got there first! Facebook now have the opportunity to enhance its photo-sharing functionality as well as attracting people who want to easily upload their photos directly to a social network.

Facebook is buying attention

Like most people, I have limited time and attention when it comes to social networking. If I’m not on Google+ then I might be on Twitter. And if I’m not on Facebook then I might spend some time on Instagram.

By acquiring Instagram Facebook has bought some of my attention and will potentially get me – and a share of the 30+ million other users – to spend more time on their social network.

Although Instagram hasn’t made any money itself to date, Facebook has recognised the potential of buying a social network in which users spend a lot of time uploaded, viewing and commenting on each other’s content.

The money to be made is therefore not in the photos themselves but in the time people will spend on Facebook (where users can be treated to the plethora of wonderful ads they get to see on their profiles and News Feeds!).

New data

Facebook relies on the data it gathers from its users to serve up the targeted ads that make up the bulk of its revenue. The acquisition of Instagram will now allow Facebook to mine new data that Instagram has gathered on its users.

And it’s not just new data that Facebook will be interested in. It’s also the type of data it will have access to.

Instagram will have collected a diverse range of data, from location, demographic and device type to time of day, who users are (biography) and to whom users share their pictures with.

Facebook will be interested in how this new, mobile-oriented social graph data can be integrated into its own so that it can continue to refine its current social networking experience.

Facebook is buying expertise

OK, so 13 people, however talented they may be, are hardly worth £1 billion. But nevertheless, Facebook will benefit from the expertise, drive and enthusiasm those guys possess.

But in addition to the people talent, Facebook are also buying themselves a ready-made photo-editing platform that they can now use to augment and improve their existing user experience.

As I mentioned before, Instagram photos themselves don’t make direct revenue but they keep people coming back. By having its own photo-editing platform, Facebook can make their own system more ‘sticky’ and stop people from running off to other social networks (such as Google+) where they might currently benefit from a richer photo-sharing experience.

Instagram is cool and fun!

On top of everything, there’s no doubting that Instagram is a very cool, fun and trendy social network and this will certainly have played a part in Facebook’s decision to buy it.

As Mike Krieger, Instagram co-founder himself has said:

“Instagram is about elevating our everyday lives into works of art”.

Facebook will benefit from their association with a hip, new, cool social network whose fans are switched-on and super passionate about telling stories and starting conversations around snapshots of their everyday lives.

And Facebook will also gain an advantage from acquiring a platform that is so intuitive and easy to use.

Whereas Flickr is a more formal experience (and one which is largely the domain of ‘real’ photographers), Instagram allows anyone, regardless of ability, to take ‘beautiful’ pictures and share them with their contacts and friends on multiple social networks.

This combination of a fun, enjoyable and easy-to-use photo-sharing experience makes Instagram a very attractive proposition. One that Facebook has paid a premium for an will hope to profit from in the long-term.

So where now?

Where Instagram goes from here is anyone’s guess and it’s certainly too early for me to make any predictions!

Will Facebook keep Instagram going as an entity in its own right or will it absorb it into the Facebook ‘system’? Will Instagram fans run off to competitors such as Hipstamatic, Lightbox and Picplz? Will the Instagram founders use their Facebook cash to set up another start-up, perhaps even an Instagram rival?

Only time will tell but whatever happens it will be interesting to see how the Instagram story develops.