The Real Reason Behind Facebook’s Instagram Acquisition

Published Tue, Apr 10th, 2012   Justin Fritz, Executive Editor

Chances are you’ve seen several headlines regarding Facebook’s decision to purchase the photo-sharing application, Instagram, for $1 billion.

This represents Facebook’s largest acquisition yet, and the biggest purchase of a photo-sharing startup ever. (The next highest was the purchase of Photobucket by News Corp (Nasdaq: NWS) in 2007 for $300 million.)

There’s no question that the deal is incredible for Instagram, considering it has 13 employees and zero revenue. And its 27-year-old founder, Kevin Systrom, is set to walk away with $400 million.

But what does Facebook get out of it?

30 Million Users is a Drop in the Bucket for Facebook

It’s a good question, and one Facebook can’t take lightly considering its IPO is just around the corner. Sure, Facebook’s projected valuation when it goes public stands at over $100 billion. So technically, $1 billion shouldn’t break the bank.

But the company still needs to justify its actions to potential investors, which could prove to be a tough sell.

Yes, Instagram is insanely popular. In just two years’ time, it’s accumulated over 30 million iPhone users – 26 million of which joined within the past year. And once the app finally made it to Android last week, it only took 12 hours for a million new users to jump on board.

As Facebook CEO, Mark Zuckerberg, said yesterday, “This is an important milestone for Facebook, because it’s the first time we’ve ever acquired a product and company with so many users.”

Okay. But Facebook doesn’t exactly need the extra users, since it already has around 850 million accounts.

Instead, I’m convinced that the move was more about eliminating competition.

Here’s why…

Facebook’s Power Play

For one, Instagram posed a bigger threat to the social network than many people realized.

Like Business Insider’s Nicholas Carlson says, “With the Facebook iPhone app, there are six screens a user has to go through before a user can actually take a picture. With Instagram, there is one. If not for today’s acquisition, this would have been a long-term problem for Facebook.”

I agree. And this ties in with Systrom’s comment last month at the SXSW conference in Austin, Texas. “Systrom made a veiled threat to Facebook on stage last month at SXSW. He said he thought of Instagram as more of a social network than a photo-sharing app. He said, ‘It’s Facebook-level engagement that we’re seeing,’” according to TechCrunch’s Kim-Mai Cutler.

And then there’s Google (Nasdaq: GOOG).

As I said back in July, Google+ has the potential to finally give the search giant a competitive edge in the social networking space. Mostly because of its unique features, like Hangouts (group video chat) and the ability to instantly upload your smartphone photos to the site.

Now, over eight months later, Google+ has experienced solid growth with 90 million users. The problem is, users aren’t as active as they are on Facebook.

According to research by comScore, in January, the average Google+ user spent just three minutes on the site. While Facebook users clocked 405 minutes on average.

With that said, getting its claws on a mega popular product like Instagram would have kept people coming back to Google+ more frequently and for longer.

Since more time on Google+ means less time on Facebook, it stands to reason that this was a major contributor to the social network’s decision to buy Instagram.

In any case, it represents a solid blow to a top competitor that Facebook no doubt hopes will get more investors tuned in to its impending IPO.

Check out Louis Basenese’s article for more information on Facebook’s IPO – and why you should avoid it.

Good investing,

Justin Fritz