Why did Facebook pay so much for Instagram?

Mark Little, Ovum Principal Analyst

AUSTRALIA: Facebook has paid $1 billion to acquire Instagram. Since its launch in October 2010 on the Apple AppStore, Instagram has proven highly addictive, especially to younger demographics, growing to upwards of 30 million users, and over a billion photos uploaded. Mark Little, principal analyst at Ovum considers why Facebook would want to pay so much for a single mobile app with no revenues? Is the bubble back?

“The Facebook proposition is becoming fat, allowing sub-propositions like photo-sharing to get lost or become difficult to access. Currently the usability of Facebook for mobile photo sharing does not match the experience offered by Instagram and many other apps that are well integrated with Android and IOS platforms. Facebook needs access to a better photo-sharing user interface to ensure it remains in control of an important type of shared content and the users that generate it.

“The positioning of the Facebook brand has also been slowly shifted by its wide popularity, with many parents and even grandparents of the younger users on the social network. Facebook needs new attractions to regenerate network effects and to continue to pull the younger demographic into its orbit.

“The price of $1 billion is certainly inflated in terms of the usual revenue multiples (Instagram has no revenue) but this will have been driven by Facebook’s main rivals and so the price tag also has an anti-competitive element driven by the cash piles of Apple ($100 billion), Microsoft ($52 billion) and Google ($45 billion). Rather than a bubble, these “inflated” prices are perhaps better described as a temporary market condition centred around a limited number of acquisition targets perceived as valuable and driven by the cash of four high-rolling Internet giants.”