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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!

Search must be reinvented for mobile.

Sometime over the next 12 months, more people will be accessing the web through mobile devices than PCs. Adding that to the time people spend in “apps,” the time people spend computing will overwhelmingly shift towards mobile. We are already seeing leading indicators, like the fact that since late 2010 more mobile devices ship each quarter than PCs. The momentum in this trend is shocking and will change entire industries.

Search is particularly screwed. Because mobile has gone the way of the app, the traditional hyperlinked structure of the web will only shrink in relevancy. Google built its massive business on this older architecture of the web, scouring the relationships between HTML pages via these links to create a ranking algorithm for its search results. What will it do when consumers instead hop from app to app to find 80% of what they need?

Anecdotally, I find myself searching less and less on my mobile devices. First off, the search experience sucks; it has essentially been ported over from web search. Second, I already have apps on my device that represent 80% of anything I’d ever want. Third, if I don’t already have that app, I am more likely to search for the relevant app, download it, and use it to find what I’m looking for.

Search needs to evolve from a paradigm that finds HTML pages to one that finds actual structured data. Furthermore, search needs to contend with vertical silos of information (i.e. apps), extract data from these silos, structure and parse it, maybe mash it back together, and deliver me the thing I’m searching for. A giant “meta search app” should sit on top of my mobile experience and be the predominant way I interface with my mobile device, just as Google was for a decade the way I interfaced with the web.

This new search experience isn’t quite what Paul Graham wrote about the other day as Frighteningly Ambitious Startup Idea #1, but it’s darn close. If you’re building it, I’d love to talk. 

YouTube in 2012: mostly mobile?

Over the last few years, I’ve begun to get more of my “what’s going on in the world”-type news from video bloggers. Traditional journalists, swayed by the political leanings of their networks and sponsors, have continued to produce heaping bucketfuls of FAIL, in my humble opinion. So, like many of my 20-something brethren, I first turned to Jon Stewart, and then to Stephen Colbert, for my daily news intake.

But, the internet in all its wonderfulness has largely changed my consumption of this type of media — not because Stewart or Colbert are any less interesting to me (far from it!), but because accessing YouTube video bloggers is so much easier. There’s no registration barrier, and I can get all my subscription content in one place.

Increasingly, the primary way I view video blogs is on my tablet or iPhone. And, apparently, I’m not alone in this. Philip DeFranco, who has 2M subscribers and posts (almost) daily, recently revealed that 52% of his video views are mobile, up from 27% a year ago:

While part of this boost was from iOS and Android apps, I have to believe that most of YouTube content consumption will be mobile in 2012. The experience of sitting back and watching on one of these devices is too good, especially when video is involved.

What this means for advertisers is unclear. Philly D admits that this is bad news for ad revenue in the short term, but he believes that a broader audience will always be a good thing in the long run. After all, I bet he makes a killing selling those monkey shirts!