Why Facebook's Instagram Acquisition Makes Sense

by Michael in ,

As you may know by now, Facebook and Instagram have announced the former social network is going to be acquiring the latter for $1 Billion.

$1 Billion is a lot of money. Many have understandably wondered why the valuation is so high. The numbers don't play out for Instagram's current user base or potential revenue streams from the current install base. Still, though, the purchase makes sense.

You see, Facebook has so far been stuck. It has been doing an excellent job of spreading to more people in more countries, but its install base is stabilizing in many western (the US, for instance). Facebook's growth right now is primarily determined by its growing install base, and that install base is increasingly mobile. You might make the mistake of only thinking I'm talking about cell phone internet access in the US and similar countries. Instead, I'm talking about countries like India, China, and many developing nations where much of the population accesses the internet exclusively through cell phones. Facebook's significance has been thus far limited to mobile users, meaning its ability to continue spreading agressively has also been limited. So the first problem Facebook has that Instagram can potentially solve is improving its reach to exclusively mobile users.

Facebook's mobile apps have, as nearly anyone using an iPhone, iPad, or Android device can attest, not been the most pleasant applications to use. They offer a limited subset of the website's featureset, are unstable, and have all kinds of inexplicable bugs that never seem to go away across multiple major releases. So the second (and probably least significant) problem Instagram might help with is having decent mobile developers on staff and the third is having a social network set up for use on a small screen from the start--meaning the mobile experience is the full experience.

That third point is important. Facebook is monetized through advertisements on its main website. There are no advertisements in the mobile apps. Facebook is completely failing to monetize the mobile experience right now. This is surely partly due to the fact that Facebook has already struggled to merely get the mobile applications to reflect most of the basic functionality of the website without also taking extra room for advertisement. It is already having difficulty in its attempts to shoehorn an experience made for the traditional desktop web browser into a tiny form factor without taking up extra screen realestate for monetization. The problem may be solvable, but a solution will not come easily.

Instagram, presumably, already has a plan for continued monetization of its business. Mobile-first and mobile-exclusive social networks will, presumably, dominate the internet in the future. This purchase by the largest "old guard" (read: traditional computer based) social network of the largest "new guard" (read: mobile based) social network is probably the best bet Facebook could make for continued relevance a decade from now.

For now the claim is that Facebook will allow Instagram to operate independently. This is probably a good call. This allows Facebook to perhaps pull a few employees here or there to improve Facebook's mobile operations with their expertise, but it more importantly also allows Facebook to own the biggest player in purely mobile social networking. Who knows? Maybe ten years from now Facebook Inc.'s biggest product will be Instagram and the Facebook website will be a legacy product. We can assume the deal will mean some integration between the two networks down the line, but it's probably in both networks' best interests to allow Instagram to grow on its own and not do anything to sacrifice its experience in order to further Facebook's. Mobile first is the future.