Six Pixels of Separation - The Blog
April 12, 2012 9:20 AM

The Billion Dollar Questions

We're all experts.

We're all experts... until Facebook buys Instagram for one billion dollars. At that point, we all have opinions. Nothing more. Nothing less. I'm still shell-shocked about this deal. There, I admit it. A lot of my peers chest thump trying to impose some kind of posture based on knowledge, but what has become abundantly clear over the past few days since this acquisition was announced is that no one really knows or understands this deal. Including me. It's all speculation.

Was this a smart move for Facebook?

Before moving forward, I will be unabashedly honest:

  1. I love Facebook. I'm a huge evangelist.
  2. I love Instagram. While I'm not a big photo person, their app is great and I get it.
  3. I am a Digital Marketing evangelist. I believe in this space.

Let's put the money behind the deal aside (for a moment). Instagram is a great acquisition for Facebook. The prevailing views about this are spot-on with my own thinking:

  • Facebook struggles to understand mobile.
  • Facebook is a web-based platform.
  • Facebook's Achilles heel is photos. It's the biggest part of Facebook and having someone like Instagram rise up (30+ million iOS users and 5+ million on the recently-launched Android platform) is a lot of people using their app and that could slowly be eating into Facebook's photo play.
  • Instagram nailed the UI and design of a mobile, social photo app.

It's a Meatloaf song.

Instagram is, ultimately, photo, mobile and social. Facebook still has the social component down, but the other two make it a "two out of three ain't bad" scenario.

Was this a bad move for Facebook?

I can't wrap my head around the price tag. I'll put aside how long Instagram has been in business (two years-ish). I'll put aside how many employees they have (under 15-ish). I'll try not rip my own arms off of my body when I think that founder, Kevin Systrom, was born in 1983 (I was busy listening to Motley Crue and trying to figure out how to make time with the ladies). I'll try not to think about the lack of revenue or business model (admittedly, this is a tough one to ignore). Here's what I want to know:

  1. How many of Instagram's users are Facebook users already?
  2. How many of those people use Instagram exclusively for their photos?
  3. How many of those users re-post to Facebook versus using Instagram and Facebook to post different kinds of pictures?
  4. How does Facebook define the value of someone seeing a tweet on Twitter to an Instagram photo and clicking on that link?

The bigger business questions. 

I'm not dumb. I get that this move is a defensive one (don't let Twitter, Google or someone else get them). It could also be defensive if Facebook thought Instagram could scale to the point that it truly does affect the Facebook business. I get that this move is a proactive one (this gets Facebook into mobile and photos in a big way... and fast). I get that a billion dollars to Facebook may be like you asking me for a quarter. Yesterday, I was speaking with a very senior digital marketing expert whose opinion I value. They too were clueless as to how that dollar amount was realized. They also speculated that if they were a conspiracy theorist, perhaps it was an acquisition that screams to the world: "If Instagram is worth a billion dollars, then Facebook is worth one hundred billion dollars!" A statement that comes on the eve of a pending Facebook IPO. It sounds juicy, but a still seems like a little much. Fast Company published a fascinating read about this deal yesterday, What The Tech Pundits Don't Get About Facebook's $1B Instagram Deal. In it, Cliff Kuang states: "There's nothing more profitable than having a great, well-designed product. And somehow, that point has eluded many in the tech press." It's also a fair point (just ask Apple), but I'm just curious: what does a billion dollars of a great mobile experience look like compared to - let's say - a one hundred million dollar mobile experience? Do we really know the answer to this? Is the chasm that vast and deep when you're at that kind of dollar count?

Welcome to the bubble.

Is this deal the "jump the shark" moment where we all realize that this is a bubble? I don't think it is. Simon Khalaf of Flurry had a data point that he shared last month: "In 1999, there were 38 million broadband Internet users worldwide. Today, there are 1.2 billion people getting broadband Internet access on their phones." The consumers are here and connected (we weren't quite there in 1999). Yes, valuations can get out of control and people who do not know what they're investing in could inflate the market, but we actually have a well-worn marketplace here with consumers who are buying. This is what makes me hope that it isn't a bubble. Instagram is a great experience. Facebook is a very smart company. It's that one little thing (the price) that still has me dumbfounded and reminds me of the old joke: "why does a dog lick himself?... Because he can."

No answers... just more questions.

By Mitch Joel


Comments Comments Feed
  • Posted by phatnancy
    Mitch Joel

    My thoughts exactly. It was like a Wal-Mart move to show off their size and power. Yes, Mark Zuckerberg and his team and exceedingly smarter than myself but it is the price. Is this a way for Facebook to compete with the possible new way people receive content on the internet?...through images. To compete with Pinterest? Questions...

    @phatnancy

    Reply
  • Posted by Andy Traub
    Mitch Joel

    Mitch, I appreciate the many questions you asked because none of us really know why FB did what they did but it's also their money and we can all assume they have more information on Instagram than we do. So was it a good decision? Even FB won't know that for awhile but as long as they're the ones footing the bill it's not our place to say if it was a good decision or not. It seems crazy to me but so does the idea of Facebook about 10 years ago.

    Reply
  • Posted by Simon Papineau
    Mitch Joel

    There's got to be something that we don't know. Some secret "behind-the-scenes" deal that's going to surface soon.

    There are also two important factors:

    1- Facebook is buying the #1 app on App Store, and the reputation that comes with it. There's a lot of "good will" money that goes with that. Is it too much? It seems so, but time will tell.

    2- Instagram had, just a few days before, raised 50m in funding from Sequoia in a 500m valuation. Maybe there's some soft of money deal between Facebook and Sequoia? I'm not sure Facebook would be able to pull off these deals once they go public, so now is the time!

    Reply
  • Posted by Sheena Rajan
    Mitch Joel

    This is an interesting buy... but I don't think Facebook thinks Instragram is worth a billion, it's the USERS that use the platform that are worth that much. Buying up the space that users live is the game now.

    Reply
  • Posted by Arjun Basu
    Mitch Joel

    Mitch. All good questions. I'm not a huge Facebook fan and never was so that's where I disagree. I don't believe in bad design being rewarded. But 900 million people can't be wrong. This, however, is good for a laugh: http://coolmaterial.com/roundup/facebook-introduces-new-instagram-filters/

    Reply
  • Posted by LucasWilk
    Mitch Joel

    I’d be far more concerned if Instagram had gone public and floated shares with a billion dollar market cap to the average speculator. That absolutely would signify that we’re in bubble territory ala 1999 given that Instagram has no profits or even revenues for that matter. Has Facebook overpaid? Probably, but one could also say that Instagram could just as well enhance Facebook’s valuation without contributing any revenues. When Google snatched YouTube for $1.5 billion that too seemed quite ‘up there’ but what if Instagram becomes the YouTube of photos? If you look at it that way then the transaction makes sense on a risk/reward basis (ie. Facebook is essentially risking 1% of its market cap to acquire a property that clearly already has lots of traction and one that has the potential to be scaled up considerably given the growth of mobile). Obviously Zuckerberg concluded that it’s a risk worth taking.

    Reply
  • Posted by rick boretsky
    Mitch Joel

    happy for instagram, but it smells like a bit of a new type of bubble to me. Valuations still need to be based on something concrete...no?

    Reply
  • Posted by Marc Ensign
    Mitch Joel

    Right there with you. Instagram is cool...but $1 billion dollars cool? That's 60% of what YouTube sold for. What would Facebook actually have to do with it just to break even let alone turn a profit? I don't see it as being that big of a game changer for them...it's not like the rest of the world is holding out from joining FB because they want more sepia toned pictures.

    Now that I got that off my chest, just to play devils advocate, perhaps that's why Mark Zuckerberg started a $100 Billion dollar company a few years ago and the rest of us haven't...he obviously sees something we don't.

    Reply
  • Posted by Zoe
    Mitch Joel

    Mitch, I can't help but agree with your final analysis related to the price FB has reached for Instagram. Firstly because they can afford it and also it does beg the question that conspiracy theorists are asking - the value of FB itself? Thought provoking post and I bet it echoes around alot of peoples minds too!

    Reply
  • Posted by Tim Sunderland
    Mitch Joel

    Maybe the Zuck was making a statement. A billion dollars. That's what it's gonna cost you to play at this level.
    That and a little of the dog licking himself.

    Reply
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