Right, Facebook is buying Instagram. But let’s not get ourselves too twisted over the dollar tag. I suspect that there was a bidding war of a sort with Google over the app. The app itself, Instagram, isn’t too important. It’s a photo app. Facebook could build it in a week, without breaking a sweat.
There are two things that Instagram has that Facebook needs: total user-engagement acceleration, and iOS power. As you know, Instagram never even tried to make money, so the valuation of it as a ‘company’ is strictly non-financial, to a point; Facebook can slap its ad network onto Instagram’s photos, once you link your profiles, of course, and boom, more pageviews to monetize.
Facebook has the ad power to do what Instagram couldn’t: make a cent.
But that’s not really the point. Facebook has to keep growing. It has to get to one billion active users in a hurry, as its public offering looms, and investors are going to demand growth. And it can’t have a pesky gnat like Instagram take any of its user momentum, user-engagement momentum, or content (photos) potential from its platform. Facebook has to be totalizing, essentially, to command the valuation that it wishes.
Now, is user growth worth a billion to Facebook? In cash, probably not. But Facebook is about to go public, and so the company is about to have all its private stock made real by the market. What better time than now to spend a pile of that currently paper money to buy something real? It’s a rather slick move.
What I’m saying is that Instagram is not worth $1,000,000,000 of cash to any company, but in this exact moment, Facebook doesn’t mind spending a pile of stock on something that had the potential to slow it down. Oh, technology, you are too funny. I’m seeing reports on Twitter that Facebook paid north of $30 per user for Instagram. You have to chuckle at that.
One last point: one company overpaying for something in a bubble doesn’t mean that it is intrinsically ‘worth’ that amount. I could pay $500 for a single Easter egg, but that wouldn’t change the value of the egg. I would just be an idiot. Just for perspective, Yahoo paid $35 million for Flickr.