Why has Facebook bought Instagram for $1bn?

Apr 10, 2012

Social network giant saw a potential future competitor in fast-growing photo-sharing app

FACEBOOK has caused a stir with its shock purchase of photo-sharing app Instagram for $1bn. Instagram - and its rivals such as Hipstamatic - have become hugely popular for offering smartphone users the ability to apply effects to photographs that make fairly ordinary snaps look older and more interesting.

However, a rumour that just a year ago Instagram was worth a mere $25m has once more raised fears that we are witnessing a new tech bubble. Facebook CEO Mark Zuckerberg said that Instagram would to all intents and purposes remain a separate entity and users would still be able to post their pictures on rival social networks. He added: “We don't plan on doing many more of these [acquisitions], if any at all."

Since October 2010, when Stanford graduates Kevin Systrom and Mike Krieger launched it as an iPhone app, Instagram has offered users the ability to apply filters to photographs giving them vintage effects such as a sepia tinge or overexposure. The photographs can then be shared with friends. Instagram has around 30 million registered users and with them come lots of valuable data and more than a billion photographs. However, the company has no obvious profit stream and employs just 13 people at its San Francisco HQ.

The figures suggest that might be the case. Instagram was worth just $25m a year ago, according to The Times. Four days, ago the company completed a funding round that valued it at $500m. The disparity between the sky-high valuation and the non-existent revenue stream is being seen as evidence that we are witnessing the kind of unwise takeover that was common at the height of the 2000 dotcom bubble.

Instagram's popularity is self-evident. When the app was launched on the Android smartphone platform this month, it was downloaded over a million times in the first 12 hours. It is thought that Facebook feared competition from a genuinely mobile-phone focused rival - or that a rival such as Google or Twitter would swoop for Instagram.

Paul Buchheit, a co-founder of FriendFeed, which Facebook acquired in 2009, told Reuters: "Anytime you see a social platform that's growing that quickly, that's got to be cause to be nervous.

"It would be better to have bought Twitter at this stage. So if you're thinking this could be the next Twitter, it could be a smart thing to do."

Paul Kedrosky, a tech investor and author of the Infectious Greed blog, told the BBC: "After launching on Android last week and adding one million users a day, it became obvious that this wasn't just a photo sharing app - it was a competitive social network, and the concern may have been that there would be rival bids."

Sign up for our daily newsletter