My take on the Instagram deal
A lot of digital ink is getting spilled over the $1B acquisition of Instagram by Facebook this week. Much of the back-and-forth is around headline price. Business Insider rightly pointed out that, on a per user basis, the acquisition price was relatively cheap compared with 10 year historical M&A comps:
Yet this analysis misses the point.
Facebook has 800M+ monthly active users (and many more registered). I’d be willing to bet that 80%+ of Instagram’s 30M+ users are already Facebook users, so Facebook clearly didn’t acquire Instagram for its user base.
What Facebook did, in fact, was a bit more strategic than the media would like to give it credit for. The major reason is mobile. Facebook’s new user growth is increasingly driven by mobile users, and even currently active web users are switching over to mobile for an increasing number of their activities on Facebook.
That creates a big problem: monetization. Is Zuckerberg, who famously fought the display ads that now grace the right side of his website, going to blanket the more limited real estate available on Facebook’s mobile app with ugly ads? I think not. He needs to get much more creative about mobile monetization. Otherwise, his overall revenue growth will not only slow down (as it has), but may start to shrink.
While Instagram hasn’t shown an ability to monetize yet, I believe it has a straightforward path to do so. Sponsored accounts could be placed into photo streams inside of the app, in a similar fashion to sponsored tweets on Twitter. The difference is that the ad unit, being a picture, can evoke a richer, more engaging experience. And, it’s built from the ground up to be a mobile experience, as opposed to a web experience retrofitted to mobile. This is just one option.
I’m sure there were other reasons the acquisition happened so quickly too. For instance, Instagram’s viral loop was likely fueled by photo sharing on Facebook, which is one of its own killer apps. That likely didn’t sit well with several teams at Facebook, who probably viewed Instagram as hitching a ride to their platform in an effort to build one of their own. It reminds me a bit of the Zynga/Facebook street fight that almost resorted in Zynga leaving Facebook altogether.
So, in short, I’m bullish on the Instagram acquisition. It answers a ton of questions I’ve had about Facebook’s mobile strategy and solves a key problem it faced to justify a $100B+ valuation heading into the IPO. While the price may seem steep today, I believe the company will be vindicated over the next few years.
Kudos to both the acquirer and acquiree for pulling this off!