Why Facebook bought Instagram

Insta-book. $1B! 13 employees! 700K+ a day “salary”! Systrom! Photos! Yay! FB! OMG. LOUD VOICES!

Ok, now that Instagram madness is covered above let’s talk about why FB bought. I’m breaking down my thoughts into 2 categories: 1) Why I think FB bought and 2) how they helped justify the price tag. I should highlight that the thoughts below are mine alone and are simply an exercise in thinking how FB arrived at its 1B conclusion.

Why did fb acquire?

Instagram is a legitimate mobile force, with the results to back it up:

  • Getting mobile right is a strategic imperative for FB. Why? Mobile is where the users are moving (see slide 11 here)
  • FB doesn’t have a track record of getting mobile right (it’s got a 2-star app rating).
  • Instagram is getting mobile right. 30M downloads and a perfect 5-star rating prove that.
  • That Instagram has 13 employees is irrelevant. FB likely has 300+ super-talented people focused on mobile. Has it produced Instagram like results? No. If you’re still arguing that FB should have just hired 13 great mobile developers for 0.1% of their acquisition cost, please read the preceding 3 sentences. The results are what matter.

Photo sharing is critical to FB:

  • FB is a social network. And by definition benefits from network effects.
  • Engaged users are engaged because user generated content continually draws them back in.
  • A massive component of that UGC is photos (FB became largest photo sharing site all the way back in 2009).
  • All of a sudden, a new photo kid is in town & growing quickly. And he understands how people share photos today (via mobile devices).

Goog-stagram:

  • Google has plenty o’ cash & has signaled their intent to muscle into the social space. 
  • FB is understandably concerned about the Google threat. While Google may not “understand” social the way Facebook might not “understand” mobile, big daddy G is still a veritable opponent.
  • Instagram would have given Google+ a menacing shot in the arm (new users, social networking chops, mobile networking stronghold)
  • If you’re FB, that sounds terrifying.

Given the strategic reasons above, how might have FB have justified the price?

If FB wants to monetize Instagram, they can. In a big way.

  • Instagram had roughly 30M installs at time of acquisition. 
  • Assume a growth curve like below, with roughly 20% of total installs coming in the last 3 months.
  • This is what avg. daily installs might have looked like for last 2 years (forecasts err on conservative side)

Instagram likely has solid retention

  • We don’t have great data here so we’ll make some assumptions
  • Systrom spoke about "FB levels of engagement" here
  • They have an impeccable 5-star rating on the app store (correlation of app store rankings to retention is very strong) 
  • We’ll assume they have D1 retention of 80% and D90 retention of 30% (meaning 90 days after install 30% of the users still use app). 
This means awesome daily average user (DAU) base
  • Given their reported installs and our assumed retention patterns, Instagram’s DAU at time of acquisition is around ~2M.
  • 2M is already huge. But potential for further growth is massive. 
  • Given the app’s launch on Android and overall mobile trends, it’s possible they’d hit ~7M DAU by March next year   
  • (SIDE NOTE: Post acquisition facts have confirmed significant growth, 10M more in 7 days).

Let’s monetize.

But how?

  • You could argue that Zynga is an unfair comparison because games are different.
  • But consumers have an even longer history of paying for photography (digital cameras today, online space today and albums, films, disposables, polaroids in the past). 
  • Regardless of the route, it seems highly plausible Instagram would be able to monetize 0.8% of DAU through some combination of added premium filters, special albums, editing features, extra space or other add ons.

What else crossed FB’s mind (the frosting on top)?

  • New data access. Semil Shah has a good explanation of some potential network mapping FB could do.
  • Recruiting top engineering talent in the valley is cutthroat. Instagram is the hip new start-up on the block. FB can sell future talent on the opportunity to work with that team. Nice bonus. 
  • "Instragram for video" - I’ll wager good money either Google or FB will scoop up an Instragram for video in the next year.