Instagram purchase gives Facebook more than money


By Ross Hettel

If you were too busy taking deep, inspirational, artsy photos in black and white on your iPhone, you may have missed out on the biggest news since Google bought YouTube: Facebook announced their acquisition of popular photosharing app and sepia filter, Instagram.

The purchase point was announced at a monstrously over-valued $1 billion. Considering that Instagram was valued at $500 million the week before, either they made some remarkable improvements in seven days, or Facebook felt the need to move quickly. The safe bet is on the latter, especially when you take into consideration that Facebook is supposed to be in their federally-mandated quiet period for their upcoming initial public offering (IPO).

Speaking of IPOs, the fact that Facebook is not announcing the percentage of stock to actual cash they paid is an interesting one. The IPO has been touted as one of the largest initial offerings ever, and how much stock they gave Instagram might be a good telling point on how overvalued they think the service is.

See, if the market decides Facebook’s shares are worth $100, but Facebook only values them at $50, then every share they pay with is giving them a 50% discount. A smart move on Facebook’s part, but not something potential investors in their IPO would be pleased to learn.

Facebook is guarding that information closely though, and for good reason.

IPOs aside, it’s probably safe to say that we are right in the middle of tech bubble 2.0 now. “Social network” is the new “dot com.” It will all come crashing down when investors realize they really can’t monetize pictures of cats and the people you went to high school with.

But what can current users expect to see in the coming months when they open their Instagram app to take a tilt-shifted photograph of a really sweet skyline?

Ads. Facebook paid roughly $33 per user for Instagram’s userbase, so they’ve got to make it worthwhile. And really, ads were inevitable seeing as how Instagram was completely free and had virtually no income.

But other than that, not much will change. They probably won’t be making their money back on this, but they gained something more important: a possible competitor. Google Plus failed miserably because it had no userbase at the beginning, and no one wants to use a social network when none of their friends are there.

It’s a bit like walking into an empty bar you’ve never been before, and starting to tell your life story to the bartender before your friends get there.

Facebook made a proactive purchase, and gobbled up Instagram before any of their competitors decided to do the same. They missed out on purchasing Twitter four years ago, I bet they don’t want to make that same mistake again.

Of course, maybe Mark Zuckerburg really wanted some more sepia filters.