Is Instagram worth a billion dollars?

You know what’s cooler than a million dollars?


 A Billion Dollars.

 ­The Social Network

So, is it? The short answer to the question of whether or not Instagram is worth a billion dollars is yes, it is, because that’s exactly the price Facebook was willing to pay for it. Did they overpay? Like the assumed benefits of the French revolution, it’s too early to tell.

You can’t help but love the story: a few guys get together to work on an idea and within less than two years they have 30 million users and then become multi-millionaires overnight. Indeed, Instagram stumbled upon a disruption strategy which has proven time and again to be extremely effective: mainly: figure out the core of what makes a popular service popular, fixate on the key ingredient and ignore everything else. In Instagram’s case they realized that you could remove all of the other noise from a social network and just focus on photography. Furthermore, their product democratizes the ability to take beautiful pictures: while some will definitely lament that the art of photography may be lost and talented photographers will be overlooked in the sea of amateurs with iphones, I see this as an opportunity for real photographers to step up their game. In addition, if everyone uses Instagram we all spend less time looking at bad photos.

But with 30 million users, was Instragram really a threat to Facebook? After all, there is still a lot that Facebook does that Instragram can’t. This question reminds me of something Eric Schmidt said when Google purchased YouTube for what many considered an over-the-top price: mainly, aside from the cost of purchasing Instagram there is a cost of not purchasing Instagram as well.

For example, what would happen if Google purchased Instragram and then integrated it into Google+? It’s entirely feasible that Instragram becomes the killer app that opens the floodgates to people migrating from Facebook to Google+. Given the fickleness of internet users, it’s entirely possible. Furthermore, Google knows how difficult it is to develop a superstar application from within a massive 30,000 company. As such, you can bet that somewhere within the halls of the Googleplex the company was having its own conversations about whether or not purchasing Instagram would complement their social efforts. Same goes for Twitter.

Another reason why Facebook’s acquisition may make sense is that the combination of the two products may be what allows Instagram to reach its full potential. Allow me to go back to the YouTube example: one of Google’s competitive advantages is its’ capacity to scale products. It’s massive network of datacenters and its ability to share information between them made Google the perfect partner for YouTube: without Google, YouTube would eventually run up against the constraints of not being able to contain all of the content users wanted to add (think about Twitter’s inability to make all of its tweets available in real time). Through Google YouTube was able to avoid the problem of having to put limits on what people could upload to its servers and how long it could live there. Freed from space constraints YouTube could continue unabated in its plan to become the undisputed host of online video, which has now reached one hour of video content uploaded per SECOND. In addition the investment paid off: YouTube has been one of Google’s fastest growing products; its’ homepage alone is represents the most valuable real-estate on the web. In other words, YouTube has definitely paid for itself: the match worked, because Google provided YouTube with the key it its success: scale.

Something similar could happen to Instagram if Facebook is able to manage the balance of maintaining the product’s simplicity while allowing for deeper connections into its social platform. The benefit of buying Instagram in the early stages is that a.) the high price tag may in fact prove itself to be a discount over time and b.) Facebook can incorporate its team before Instragam develops its own firm corporate identity and culture. Incompatible cultures can make for deal-breakers in the success of an acquisition, as culture is the means through which cooperation and collaboration take place. If two companies can’t agree on certain behavioural norms than the Founders of the acquired company may be driven out and thus the motor which created the initial success is removed. What is left is a nice-looking chassis which ultimately isn’t going to get you anywhere.

The last question I’d like to address is what does this acquisition tell us about Facebook. Is the company naïve and spending its money unwisely? Are Mark and Sheryl panicking? Is this a knee jerk reaction to that could distract Facebook from its core mission? While these statements may prove true over time, my feeling is that the Instagram acquisition shows that that Facebook is a maturing company that understands the forces that have given it life and that can thus can take it away.

Facebook owes its success to the fact on the internet, as Eric Schmidt has said, competition is only ever one click away. The ability to succeed in this type of marketplace requires one to be constantly thinking ahead and never content with the status-quo. The same factors that allowed Instagram to become a billion dollar company in less than two years can make it worth nothing in even less time if users find something more interesting and migrate in droves. Interestingly the only public appearance of the founders of Instragram was a technical presentation in which they detailed how they managed to scale their product so fast. By making that information public Instagram is contributing to others’ abilities to replicate their success and thus make scale less of a competitive advantage for the Googles and Facebooks of the world.

Standing still is what leads to seemingly comatose companies like Yahoo! And Microsoft. Like deer in headlights they’re paralyzed, not sure in which direction to move and unable to get out of the way of the trove of cars coming at them. Zuckerberg may be taking a big bet, but he also understands that far worse is not taking any bets. Furthermore, as every techie-delivered commencement address will remind you, failure is not the opposite of success but instead an inherent component of it. If you’re not failing you’re not trying.

So was the one billion dollar price tag worth it? While it’s easy to point to metrics that demonstrate that the cost was too high it’s much more difficult to calculate the cost of inaction given Instagram’s growth trajectory.  There will be some tech journalists who accuse Zuckerberg of being rash, but their ability to decipher the present often comes at the cost of their ability to look deep into the future. There is a reason, after all, why they struggling to meet their 10 article a day quota instead of joining the other tech billionaires on their souped-up yachts in the Caribbean.

A Note on The Google+ Re-Design:

Speaking of tech journalists eager to declare Google+ dead, Google+ this week launched a re-design which in my opinion greatly improves the quality of the product. The re-design comes just as many are declaring the project a failure. Without wanting to get into the non-apparent benefits that comes from Google integrating all of its products, what I do want to point out is that a.) people have very short memories and b.) beta might not mean anything to you because Google has abused the term but it actually does mean something to them. Most celebrate Gmail as the foremost email provider on the web, and indeed having a gmail account is often used as a proxy as to whether or not a person is actually tech-savvy. What people forget is that Gmail took years to become the product that today everyone knows and loves. At the time of it’s launch Google was more obscure and the internet hadn’t the penetration in people’s lives as it does today. Google+ will follow a similar path as Gmail because it’s a multi-purpose platform and, unlike more simple products like Instagram, multi-purpose applications take time to develop, especially as they search for their best use-case and value proposition. Given the strength of Google’s revenue, it can afford for the product to flounder for some time until it develops those killer apps. One example YouTube

About Matthew Carpenter-Arevalo

A former Google and Twitter manager, Matthew Carpenter-Arévalo is the founder and CEO of Céntrico Digital, a managed marketing services company.

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