Facebook's Billion Dollar Bet

A lot has been written about the $1bn purchase of Instagram by online giant Facebook. The media and business world was surprised to say the least, for two main reasons.

Firstly the timing. As covered previously in this blog Facebook is in the process of preparing for a huge stock market flotation. Given that, most normal companies would try not to rock the boat too much, or make any investment decisions that could potentially spook new investors. Facebook is far from a normal company however.

Secondly, and perhaps most eye-catching, is the price.

Facebook have agreed to pay $1bn albeit in a combination of cash and shares. Most media analysts have declared their view that this has vastly overestimated Instagram’s value.  Commentators have been quick to point out that the company, which has less than 20 employees and no revenue streams, has in effect been valued at more than venerable ‘old’ media institutions such as the New York Times. In addition, it has since emerged that Instagram had only two weeks previously been through a funding round with venture capitalists that valued it at $500m.

So, did Facebook overpay?

As ever, it depends on the reason they bought the company.

The first fact to point out is that the service already boasts 30m registered users and is growing fast. Its Android app for example was downloaded more than a million times in just 24 hours after its launch on April 3^rd.

On the simple mathematics of the price one Google executive has noted that Facebook is paying around $28 per user for Instagram, whereas other social apps have been valued at anywhere between $20 and $50 per user. Many of Instagram’s fans are probably Facebook members, but access to even more data about consumers is what is currently motivating Facebook and driving its ability to successfully monetise its own content.

Another key reason for the purchase is the mobile space that Instagram has expertly navigated, and Facebook still struggles in. As we pointed out a few weeks ago in this blog, the mobile internet is the area that Facebook will have to crack. Nearly half of its total monthly users are now accessing the social network through mobile devices. The expertise that resides in Instagram that has produced such slick, user friendly apps in contrast to Facebook’s own is invaluable to the company right now.

Lastly, one other thought behind Facebook snapping up Instagram is simply to remove a potential rival from the marketplace. Instagram’s growth has showed Facebook how a small, nimble start up could potentially take users away from the more established social networks. Its very speed of growth had certainly alerted rivals such as Twitter and Google to the company, and Google in particular were rumoured to be eyeing a bid in order to give some much needed impetus to its Google + platform.  

$1bn is certainly a hefty price tag. But time will tell if it was a price worth paying.