Understanding Facebook’s $1 Billion Instagram Purchase

With news breaking on Monday that Facebook will purchase the budding picture edit-and-upload service Instagram, many immediately wondered about the implications of this move.

The immediate motivations are clear – why try to compete against someone you can buy? Instagram is among the fastest-growing digital services in the world, with over 50 million users worldwide and over 5 million downloads in the first week of its release for Android phones.

Looking at these numbers, it’s no shocker that Google and Facebook both tried to convince the company to join forces with the service multiple times over the past 18 months. So with the huge success of its recent Android release, it looks like Facebook was simply the first one to actually show Instagram founders Mike Krieger and Kevin Systrom the money they wanted.

Still, two things immediately stand out to me about this move. First is the money – $1 billion is a huge sum, especially for a company that was valued at ‘only’ $500 million as recently as last week. I can’t see any Instagram investor being unhappy about a 2-1 return.

Let’s put that money in perspective for a second: with the move, Instagram’s value has surpassed that of the New York Times Corporation, arguably the foremost of all traditional print media. We’re not talking about Facebook or Google here; we’re talking about a recent start up that is just beginning to make its mark in the digital age.

But why would Facebook shell out that kind of money? Was it simple drawn into a bidding war against Google that led to overspending? Did it see an opportunity to acquire a service with the potential to dominate the picture-uploading scene? Or was it something else altogether?

It’s important to remember that Facebook has no money problems. The San Francisco Chronicle is reporting that even after acquiring Instagram, the company will have another $4 billion to spend on potential other purchases, a number undoubtedly connected to its Initial Public Offering of $5 billion on February 1 this year.

Still, the money – as well as the value of Facebook’s IPO – shows the rapidly increasing value placed on digital means of communications. We’ve heard prognosis upon prognosis about the internet overtaking traditional media, and now, the companies themselves are starting to agree.

Investing in the assumed future has always been tempting, and can easily backfire (as the dot-com bubble burst in 2000 so drastically showed). But over the past seven years, Facebook has shown its commitment to making the digital media an integral part of all of our lives. If it can achieve similar results with Instagram, the investment will have been well worth it.

The second thing that struck me as curious about the move was its timing. Facebook had been rumored for some time to work on developing its own photo edit-and-upload application, and it seems that acquiring Instagram has put an abrupt halt to that plan.

Does that mean the company caved in, realizing its app would not have reached Instagram’s level? Possibly, but purchasing Instagram accomplished multiple things at once: staying ahead of Google in terms of uploading pictures, getting rid of a potentially serious future competitor for the same field in the future, and taking over something that is already working and has an established community instead of having to get there from scratch. Having the money to spend, the decision was made easy.

Here, one important detail to note is that Zuckerberg immediately mentioned on his Facebook timeline that he is “committed to building and growing Instagram independently,” going against his prior policy of only acquiring services that can be integrated directly into Facebook. In fact, users will still be able to upload pictures to non-Facebook social media such as Twitter or Google+. Looking at it in that way, the move is similar Google’s 2006 purchase of YouTube, which occurred after the Search Engine Giant had tried in vain to develop its own video service.

In all, Facebook’s purchase of Instagram to me represents an example of what has and will become a major part of digital media: a media consolidation that is not unlike what we have seen in the traditional media and is currently taking place in the airline industry. Giants like Google, Apple, Facebook, and Microsoft (which coincidentally just bought over 800 patents from former internet giant AOL) will continue to increase their dominance over minor services by diversifying their offerings through services like Instagram.

But before you start screaming foul play, consider this: we live in in an era of infinite internet services, the sheer amount of which have become so confusing that many casual internet users shy away from using any of them personally or professionally. Even as a college student, I have heard the argument that “we don’t want to use social networks because they will get out of hand and we won’t be able to manage them all.”

Oligopoly concerns aside, digital media consolidation also means a simplification of services, allowing more people to take advantage of the possibilities inherent in the internet. A future in which digital media has become part of the ‘traditional’ media repertoire?  Sign me up. Facebook’s purchase of Instagram might just show that we’re close.

Image Credits to: CBSNews.com, Facebook, Instagram, Forbes.com

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