Why did Facebook really acquire Instagram?

Yesterday Facebook released a new app called Camera and, just like that, the fog lifted. The reason Zuck and his crew shelled out $1 billion (insert Dr Evil joke here) for Instagram suddenly became a little more clear.

An application that allows you to add filters and effects to photos on your iPhone or iPad before batch uploading them to Facebook, one presumes that FB will quickly roll out the ability to share to other social networks with a nice ‘shared via Facebook’ stamp at the bottom.

Of course, there are a few reasons why companies acquire other companies. I set out to think about whether any of these reasons were relevant to the hefty cheque Facebook recently made out to Instagram.

1. Talent Acquisition

Sometimes a company buys another one, knowing that it will shut it down, but plans to keep all of the super-talented staff to work for them. Recent examples of this include Gowalla and Lightbox, who were both acqui-hired by Facebook. There’s no doubt that this can be a great move, but a price tag of $1bn for 11 people (in the case of Instagram) isn’t exactly a cheap way to do business.

2. Tech Acquisition

Often companies buy other smaller companies for the products they have produced. These smaller companies tend not to have many customers because they can’t afford to do much marketing, so are spotted and snapped up before they get much traction. Of course, this wasn’t the case with Instagram, who had lots of traction (35 million users).

The supposition that Facebook bought Instagram because they couldn’t build its features themselves is also completely untrue. In an interview with Business Insider (http://articles.businessinsider.com/2011-11-28/tech/30449353_1_android-instagram-app), Instagram CEO Kevin Systrom said the following – “If you go to my Flickr page, you’ll see a photo that looks like an Instagram photo from about 2007. I’ve always been into taking my photos, cropping them square, putting them through a filter in Photoshop. We just reverse engineered how to do filters, now we opened it up to the masses.”

Facebook have proven that they have deep pockets – it wouldn’t have been difficult for them to hire a few Photoshop junkies to reverse engineer some filters for them. However, consider each of these headlines – ‘Facebook releases Instagram clone’ or ‘Facebook integrates technology from recent purchase Instagram into new Camera app’. Clearly, the second is far more desirable.

3. Customer acquisition

Bearing more resemblance to traditional mergers, companies sometimes buy other companies so they can get their hands on all their users. There are a lot of different reasons why a CEO might want to do this, but it often comes down to eyeballs. When Facebook acquired Instagram and Newscorp acquired Myspace stories about the buyouts were splashed all over the covers of…well, everything. Taking something that already has a fanatical userbase, as both of the above services did, truly mainstream (even my grandma knows what Instagram is now…) is worth spending money on.

4. Competition Acquisition

Sometimes the owner of a company feels (whether or not it’s actually the case is another matter) that it has to acquire a competitor to protect the company. While photos is a huge part of Facebook’s offering (2.7 million uploaded every 20 minutes), Instagram was a real threat – before the acquisition they were seeing 5 million photos uploaded every day. Certainly, there’s a big gap between those numbers, but there’s an equally big gap between the ‘value’ of those photos – while a lot of Facebook users simply upload hundreds of holiday photos out of habit, photos on Instagram tend to have an aspirational quality to them; many represent a distinct memory that people are excited to preserve. The same can’t be said of many social networks – Pinterest and Tumblr both have an aspirational quality but rely heavily on recycled content, and Twitter (in very general terms) tends to be more about words than pictures.

Did Facebook just get scared and write a big cheque to take out a competitor? Maybe, but if Zuck is astute as his track record (up until the botched IPO anyway…) suggests, there’s much more to it than that. Regardless, there’s a lesson to be learnt from the takeover – you don’t need to build a Facebook killer to become a multi-millionaire; you just need to build something that’s starting to look like one…even if only through a tilt shifted sepia filter.


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