With Facebook’s highly anticipated IPO coming closer and closer, what better way for the giant social networking company to cash in on its upcoming payday than acquiring a company, right? Facebook is currently Silicon Valley’s favorite tech company and hopes are quite high that its IPO will raise billions and make its initial backers, founders, and initial employees very wealthy. When you have this much goodwill and perceived value, it is easy to find companies that want to join your team via buyout. That’s why it is no surprise that the highly popular mobile photo sharing company, Instagram quickly agreed to be bought out by Facebook for cash and stock valued at $1 Billion. That’s a jaw-dropping figure-specially for a company that has only 9 employees and has yet to make one red cent off its photo sharing service. You are probably tempted to think: What is Mark Zuckerberg thinking?
At first glance, the purchase might look so bold that some observers might say it is impulsive and almost reckless. However, the more people pick apart the details and the dynamics in play here, it might be a brilliant move. Keep in mind that Facebook is partly paying in company stock. The company hasn’t gone IPO yet so we’re talking about “potential value.” In essence, Facebook is cashing in some of its clout and hype to acquire something real. Critics of the deal might say that Instagram is not that real considering its small size, no revenue, and recent vintage. That would be missing the point. Instagram is very viral and has dominated the iOS app market for photo sharing. Its recently released Android version is one of the hottest and most downloaded apps for that platform. It has already amassed 30 million registered users and its growth rate continues to grow.
Facebook’s traffic is getting extremely mobile. Half of its traffic access the service from mobile devices. Analysts predict this portion of Facebook’s users to continue increasing in the future. Facebook’s current photosharing and photo-based community building capabilities is tied solidly to its Facebook mobile App which does not have any ads. As it stands, Facebook’s own mobile photo community efforts are quite limited and don’t share Instagram’s explosive mobile growth trajectory. Instagram is doing well in the one area Facebook needs to dominate-mobile phone sharing. Facebook’s massive rise is due to its web-based photo sharing. However, it has been having a tough time trying to replicate the same success in a mobile environment. In essence, Instagram succeeded where Facebook was flailing. Looking at the deal from this perspective, the deal makes sense. Facebook needs an independent “hook” into the fast-growing mobile market that is outside of Facebook. It is also buying out a company that could potentially morph into a direct competitor. The networking service gets another opportunity to stay in the sights of its users even if they are not using the FB app. Moreover, FB now owns a service that shares photos on other social networks. This explodes FB’s reach.
The Facebook acquisition deal is a massive coup for Instagram’s venture capital investors. Keep in mind that the company only launched its iOS app in 2010 and its Android version in 2012. Its last investment round, in 2011, valued the startup at $100 million. Moreover, the portion of the purchase that was made with Facebook stock might even be worth more once Facebook has its IPO since its pre-IPO valuation is probably below its IPO offering valuation. And we’re not even factoring in whatever increase in value that stock may experience post-IPO.
While it might look like “Search Plus Your World” would be an easy target for blame, the answers are not that clear cut because Facebook already began to suffer a traffic fall prior to “Search Plus Your World”‘s debut. Many people are stumped but we’re sure this mystery is bound to clear up soon.