Why Wait for an IPO - Facebook Buys Instagram for $1 Billion
posted Monday Apr 9, 2012 by Scott Ertz
It's been a long time since an Internet conglomerate purchasing a fast-growing start-up for way above its valuation has caught the world's attention. In fact, the last time it happened was Google purchasing YouTube in 2006. That is why today's announcement that Facebook has purchased photo sharing service Instagram for a cool $1 billion is such a shocker.
Like YouTube, Instagram has only been around about 2 years and gained popularity rapidly and surprisingly. While YouTube got to where it is because of a single upload of the comedic music video for Lazy Sunday from Saturday Night Live, Instagram has grown in popularity because of the viral nature of the product itself. Every time someone shares a photo through the service, it is incredibly branded, advertising itself to everyone who sees it. This has helped build the business incredibly fast.
Now, when I say business, I use the term loosely. Like Twitter, who they currently integrate with for photo sharing, there seems to be no business model. The app is free, the service is free but the servers that power it are not. The only business model available to them was an acquisition by an existing company. Now enters Facebook.
Why would Facebook want Instagram as part of their family and why make the purchase now, just ahead of their IPO? Hit the break to find out.
First, Facebook is the world's largest photo sharing system but Instagram has been growing at a ridiculously rapid pace. In fact, through its Android and iOS apps, it has been adding about 26 million new users PER DAY. Yes, you read that correctly - 26 million per day. There is no way Facebook wasn't feeling the pressure of competition here, especially in the ever-increasing and important mobile world. While it may not have threatened Facebook's social lead, it certainly has the ability to change how people share their photos.
Facebook does not want people issuing another name associated with their photos on Facebook. "Uploaded via Instagram" does not instill confidence in possible investors looking to give Facebook money. That is the reason Facebook entertained the idea. The last thing Facebook needs right now, however, with their $100 billion IPO so close, is talk about their lead slipping, whether it really is or not, whether it be to Instagram or to a competitor making the purchase instead. That is the reason Facebook decided to do it right now.
Making this purchase, especially a purchase this large, during their required quiet period proves that Facebook management thought this was going to affect their stock price negatively. Obviously Facebook would have preferred not do this today as they are now required to file amended IPO papers because of the size and type of acquisition. This could delay their IPO or even put it on hold indefinitely, but Facebook must have thought this was preferable to losing Instagram to Twitter.
What do you think? Was this a good purchase for Facebook or will it negatively affect either or both services? Let us know in the comments.