Facebook buys Instagram ...but for what?

(CNET) - There's a lot of speculation today about why Facebook would spend $1 billion to acquire the uber-hip photo-sharing app Instagram.

To some, it seems obvious; to others, it's the biggest sign yet of a growing Web bubble. To me, it just raises question after question, and the biggest one is "why." What does Facebook gain from buying Instagram?

Users: Instagram has 30 million users and a potentially huge influx of more, thanks to its recent expansion onto the Android platform. Instagram CEO Kevin Systrom says he thinks Instagram should easily reach 100 million user - that's significant engagement, for sure.

But Facebook doesn't need users. Facebook has users - some 850 million of them. And while I've argued that Facebook's growth potential is slowing, the social network could scoop up another 100 million global users with its eyes closed over the next year, especially as its global expansion increases. And I'm not sure Facebook is in the market for more users so much as it's in the business of figuring out how to make money off those users. So far, Instagram represents more users, but not any more revenue: more mouths to feed, if you will. Facebook shouldn't be after more un-monetized users, at this point.

50 Photos

50 more incredible Instagram photos

Mobile: My colleague Rafe Needleman and others argue that mobile engagement is the biggest reason Facebook lusts after Instagram. A large (and growing) and super-engaged mobile audience and decent mobile uploading (which Facebook still lacks, for some reason): that must be it. Mobile is where it's at, after all: go mobile or die.

That doesn't feel right either. After all, mobile is both boon and bane for Facebook. Again, Facebook already has mobile users: in December 2011, it said 425 million monthly active users got to Facebook on a mobile device. It has mobile apps now on every platform - the fact that they're not very good, in some cases, doesn't mean they're not in wide use. Facebook doesn't have a problem with acquiring mobile users: it has a problem making money off them.

If you believe Facebook's S-2 filing in advance of its upcoming IPO, the company is, in fact, deeply concerned that an expanding mobile base could be a serious problem for its business. Remember this?

"Although the substantial majority of our mobile users also access and engage with Facebook on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices. We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven."

So, then, why buy a primarily mobile app that doesn't currently, as far as we know, make any money?

Instagram's stated goal has been to build lots of users, then serve them ads - the song of every app maker on the market. Well, they'll probably get a lot more users from a Facebook purchase, but how long does it actually take to make back a billion dollars, especially when no one has yet managed to rake in significant dough from mobile ads? It seems to me that an acquisition like this could actually deepen Facebook's mobile woes, at least in the short term. Yes, Facebook needs to be mobile, but isn't Instagram just another pressure point?

Competition: As investor Chris Dixon put it on Twitter, "Giving up 1% of your market cap to take out your biggest threat is a savvy move."

That's an argument that could have legs. Instagram CEO Systrom told Venture Beat that it plans to "help every user on earth share their lives and discover the world through a series of beautiful images." (Emphasis added.) That's an ambition worthy of Mark Zuckerberg himself, and Android expansion is a major step in the world domination direction.

Or is it?

Photo filter apps are hardly the precious commodity they were when Instagram was still frustratingly iPhone-only. Lightbox, PicPlz, Little Photo, Magic Hour ... here's a list of just 10 apps that easily replace the filtering capabilities of Instagram on Android, and there are many more out there.

And if it's filters plus a new community to sign up for that you're after, why, Facebook and Instagram competitor Path are also on Android. I'd argue, however, that considering the wide breadth of Android users, most of them are not, in fact, in search of yet another hip new photo-sharing network to sign up for, which is its own potential growth issue for Instagram. If Android users already have Picasa for photo sharing, lots of good app replacements for applying filters, Facebook for social networking, and Path for all of the above, is the hipster allure of Instagram enough to get them signing up in droves? Or is that just the San Francisco Bay Area bubble talking?

Data: OK, so if it's not users, it's not mobile, and it's not taking out the competition, maybe it's just data. Instagram's 30 million users have uploaded some 100 million photos that are conveniently geo-tagged and maybe kind of personal.

Really? Facebook needs more personal data? Facebook's users upload 100 million photos a day. They're not only geo-tagged, they're also tagged with precise business locations and other people, all of whose information is also already on Facebook. Instagram doesn't strike me as the treasure trove of personal data that Facebook needs to finally, at long last, crack the nut on targeting ads.

The questions go on and on. There are a few answers that do make sense: the acquisition keeps Instagram away from Google and Twitter, both major competitors. Notably, it gets some decent engineering into the House of Facebook that can shore up Facebook's mobile-uploading and site-viewing interfaces, both of which badly need an overhaul. And maybe all the above data points, in aggregate, do actually add up to $1 billion in reasons.

But I can't help it: I still feel like there are more questions than answers to why this price tag makes sense. I hope Facebook isn't getting distracted by hipster buzz or the photo-sharing bubble, especially at a time when its business decisions need to be as sound as possible to shore up future investor confidence. Don't spend those billions before you've got them, guys.

50 Photos

50 more incredible Instagram photos

[hypnotoad72]

Selling peoples' pics for Facebook's personal profit. As usual, someone else labors and their hard work is upended by some greedy leech.

Why else buy a company? Philanthropy?? Not in "the new normal" or anything leading up to "the new normal".

[BenFitzkee]

The problem with assessing whether or not this is a bubble is that this information economy is still in its infancy. Having this conversation now would be like trying to envision the way Gutenberg's printing press would revolutionize the world, and doing it only 20 years after it's invention. This single invention fueled revolutions of science, religion and education, but his first venture led to him being sued and left with an enormous debt. The invention revolutionized the world long before a viable business model emerged to support the mass production of books for commercial gain. This should not be seen as a critique of the technology, but an acknowledgement that the business model for success was not fully realized.
Similarly, anyone who saw one of Henry Ford's model T's roll past them would have instantly known that this invention was going to completely change life as they knew it, but making money from the invention is entirely different. The car has persisted over the last century, but hundreds of companies have gone bust trying to make a few bucks from this technology.
While cars rely on a network of roads, and a supply of fuel; the internet relys on a network of wires, or increasingly wireless, and the fuel is the bits being created by the users (consumers/producers). In 1904 the United States could produce the gasoline needed to power this new invention, but since then we have become dependent on others, both friends and foes. Certainly no one thinks that the car industry represents a large bubble in today's economy, but imagine if suddenly Israel attacks Iran, or the thus far stable House of Saud was to crumble like the various dictatorships around it. Imagine what this would do to gas prices, and therefore the car industry. By conventional terms this does not represent an overvaluation, and is therefore not a bubble, but is nontheless a very real possibility that could easily undermine the future of a number of currently viable companies.
As it stands, Facebook, Google, Apple, Yahoo etc. depend on networks (roads) to efficiently transport the bits (oil) being produced by their users. Currently these tech companies are not responsible for assisting in maintaining or improving the networks that they rely upon, but I believe that it is a reasonable assumption that they will assume some of those costs in the future, and if not, the ability for their users to access their services will diminish as the cost of data becomes prohibitive for those of modest means. Secondly, current valuations assume that the Net will exist largely as it does now, with little changes to things like the physical structure or user privacy. I believe that this is a faulty assumption, given the recent activity in congress, and increasing grumblings from consumers over how their data is being used. Something as simple as a Do Not Track ammendment, tacked on to some meaningless transportation bill, or an increasing use of encryption by users, could have significant effects on a companies ability to monetize their user base. Lastly, majority of the worlds internet users are currently in relatively wealthy countries who's governments are largely democratic, but the rest of the world does not mirror these demographics. Future growth will come from poorer, more autocratic countries. I doubt the Egyptian, and Tunisian citizens who have bravely risked their lives to free themselves from an overbearing dictatorship will be eager to reveal everything they say and do going forward. Freely embracing a service that allows you to communicate to overthrow a dictator should not be confused with an acceptance of data mining ad infinitum in exchange for a discounted guided tour of the pyramids. These internet users will be even less likely to embrace being exploited by Western companies, and will value privacy and anonymity more than those in Western countries.
While I do not believe that we have created a bubble in the classic sense, this information economy is more fragile than most believe. I believe the Arab spring, SOPA, Occupy Wall Street etc. are only the birth pains of this new digital economy. Facebook may be worth 100bn today, but past performance is no guarentee of future success. Just ask Netscape, AOL, and Yahoo.

[scottief4]

have you guys ever heard of Photorankr.com? While instagram sells out to facebook, Photorankr hasn't hit mainstream yet, and is still a great place to post your work and get real feedback for people who love photography. It's got the social networking side too, because you can follow other photographers to build your own photostream of your favorite work. Anyone can sell their photos and you maintain the copyright. check it out http://photorankr.com