Was Facebook’s purchase of Instagram motivated by fear?

April 11, 2012

It’s true — $1 billion really is cool. Just ask the guys at Instagram, who sold their mobile photo sharing app — along with their entire team (all 13 of them) — to Facebook for that astronomical figure this week.

Now a lot of people are asking the same questions: Why is Instagram worth so much money, and what is Facebook planning to do with the service?

First, a crash course on Instagram’s history and functionality. The small, San Francisco-based company was founded in 2010 by Stanford grads Kevin Systrom and Mike Krieger. Until this week, the entire venture had been privately funded and the company was estimated to be valued at $500 million — half of what Facebook paid for it, I might remind you.

If you’re not familiar with the Instagram app (which remained exclusive to Apple’s iOS until last week, when the company released an Android version), it’s very straightforward. Instagram allows you to take snapshots with your phone and then apply visual filters that make the image look like an old picture you found in the attic of your grandmother’s house. Weathered, yellowed, beat up, washed out — and generally a little funky.

You can then share those photos with other people who are on Instagram as well as on Twitter, Facebook and other social networks.

Somewhere along the way, the company amassed about 30 million users. When the app was released for Android, it picked up an additional 5 million users in less than a week.

But before the service even hit that milestone, Facebook founder Mark Zuckerberg surprised the world by announcing that his company was acquiring the startup in totality for the breathtaking $1 billion.

Now, big acquisitions are relatively normal in Silicon Valley. But for a company the size of Instagram to be purchased so quickly and for so much money — well, it’s not business as usual.

Oh, did I mention that Instagram generates no revenue?

So just why did Facebook single out Instagram? Facebook doesn’t have much of a history of acquisitions. It has picked up a few pieces along the way, notably the social streaming service FriendFeed (which it has let die on the vine) and Foursquare competitor Gowalla (which it shut down), and has certainly plucked many talented engineers from other jobs. But a major investment like this is rather unprecedented.

In his post on Facebook, Zuckerberg even intimated that this wouldn’t be a trend for the company, saying: “This is an important milestone for Facebook because it’s the first time we’ve ever acquired a product and company with so many users. We don’t plan on doing many more of these, if any at all.”

There are many theories in the industry about why Facebook made this move. Some think it was defensive, perhaps fending off other bidders, or preempting them altogether as Facebook tries to figure out how to translate its popular service into an increasingly mobile world. Others speculate that the company was motivated out of fear. Om Malik, founder of the popular GigaOM tech blog, tackled that angle in a post this week. Malik wrote: “Facebook . . . knew that for [the] first time in its life it arguably had a competitor that could not only eat its lunch, but also destroy its future prospects,” suggesting that Instagram had done with photo sharing what Facebook had not: made an emotional connection.

Or maybe Zuckerberg just wanted to be the guy who was offering the cool $1 billion.

Regardless, the service is going to become a part of Facebook. So what does that mean? Zuckerberg and the Instagram founders say they plan to keep the standalone application available and will continue to allow it to connect with other social networks. But it’s likely that some of that Instagram DNA will come to the Facebook platform, at least as far as photos are concerned.

Given that Facebook’s most visible new addition is the Timeline, a feature that is primarily concerned with nostalgia and how we interact with and view past events, a photo treatment that creates an artificial sense of nostalgia seems perfectly matched.

Facebook, of course, hasn’t announced any formal plans at this point, but it would be surprising if it didn’t at least bring the company’s photo processing tools to the service.

One thing is certain: Although the Instagram acquisition might not represent a trend in Silicon Valley — companies selling for double their value — it does show that there are fortunes to be made in this new industry. An industry where a good idea and good execution can make you a very, very rich person.

And I guess that is pretty cool.

Joshua Topolsky is the founding editor in chief of the Verge (theverge.com), a technology news Web site. To read previous columns, go to PostBusiness.com.

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