A picture worth $1bn

In an unexpected move, Facebook has acquired popular photo-sharing app Instagram for $1 billion in cash and shares.

The announcement follows last week's release of the Instagram for Android app. The photo-sharing app had already accumulated over 30 million users on iOS alone, and the Android app notched up over a million downloads in the first 24 hours of availability.

Facebook founder and CEO Mark Zuckerberg broke the news of the deal via a post on his Timeline on Monday evening. “For years, we've focused on building the best experience for sharing photos with your friends and family. Now, we'll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests,” said Zuckerberg.

Zuckerberg also emphasised the importance of building and growing Instagram independently of Facebook. “Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.

“This is an important milestone for Facebook, because it's the first time we've ever acquired a product and company with so many users. We don't plan on doing many more of these, if any at all. But providing the best photo-sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together,” said Zuckerberg.

Instagram CEO Kevin Systrom said in a blog post that he and his team “couldn't be happier” to announce they have agreed to be acquired by Facebook. “With the support and cross-pollination of ideas and talent at a place like Facebook, we hope to create an even more exciting future for Instagram and Facebook alike.”

Starfish Mobile International CTO Jon Hoehler says it is noteworthy that the $1 billion price tag placed on Instagram was not based on revenue, but rather IP, and the value of the Instagram community (most recent estimates valued Instagram at $500 million).

“Acquisitions like this, that move away from valuations based on actual profitability and revenue streams of Internet-based starts-ups, are only going to continue. Users can only belong to a finite amount of online communities, and large organisations like Facebook and Google will continue to buy up these smaller communities.”

Hoehler warns that, while such purchases with low or no revenue streams will continue, it is not sustainable in the long run. “Eventually there might just be another bubble on the horizon.”

World Wide Worx MD Arthur Goldstuck says the reasoning behind the acquisition is simple: Facebook wants to own photo-sharing. “Here you have an early-stage photo-sharing player that is on a rapidly climbing trajectory, but can still be had cheaply. The question is not why Facebook bought it, but rather, why wouldn't Facebook buy it? Fear and greed often go hand in hand, but in this case the simpler answer is that it consolidates Facebook's position in this arena.”

Goldstuck says Instagram represented a seismic shift not only in the way people regard their photos, but also in what makes an application “cool”. “At the heart of early enthusiasm was the fact that it was another way iPhone users could pretend their device was cooler than any other, but that was never going to last. What it did do was build a critical mass of early adopters who would create a buzz about the product.”

Goldstuck adds that Instagram's cross-over to Android was inevitable and indicated that the app would maintain its upward trajectory and would eventually challenge the dominance of Facebook in this space, in a way that Flickr and Picasa never could.

Hoehler says that in the short-term, it will be important for Facebook to maintain the status quo, especially in terms of continuing to allow uploads to multiple third-party networks. A potential challenge could be posed by Facebook's plans to monetise its mobile offerings by serving ads into its mobile channels.

“One of the best features of Instagram was that there was no advertising, especially as the app is free. How Facebook manages this dynamic moving forward is, in my view, going to be one of the interesting challenges facing Mark Zuckerberg and the advertising and product teams at Facebook,” notes Hoehler.

Users' reaction to the announcement has been mixed. While some have welcomed the move, a number of Instagram users took to Twitter to express their disappointment and threaten to shut down their accounts. A protest hashtag “Instablack

” has also been gaining momentum. Goldstuck says: “The backlash is symbolic of a deep-seated psychology of superiority among certain categories of technology users.

“If you refuse to use it because it's on Android and Facebook, it means you weren't using it for its utility, but for the status it gave you. It is an idiotic approach to technology use, and there can be little sympathy.”

Looking at the social media landscape at large, Goldstuck says: “Both the acquisition of Instagram by Facebook and Posterous by Twitter will spark renewed fervour to come up with the next big app or platform that can be sold to one of the big guys. Every developer is looking for a big payday, and this just fuels the dreams, although in most cases not the reality.”

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