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13 APRIL 2012
Why Facebook bought Instagram

by Arthur Goldstuck: A South African journalist, media analyst and commentator on information and communications technology.

Why did Facebook pay a billion dollars for Instagram? The answer is simple: Facebook wants to own photo-sharing.

Here you have an early-stage photo-sharing player that is on a rapidly climbing trajectory, but can still be had cheaply. The question is not why Facebook bought it, but rather, why WOULDN’T Facebook buy it? Fear and greed often go hand in hand, but in this case the simpler answer is that it consolidates Facebook’s position in this arena.

Facebook is already acknowledged as the biggest repository of photos on the Internet, and probably in all of history. The coming of Instagram has represented a seismic shift not only in the way people regard their photos, but also in what makes an application cool. At the heart of early enthusiasm was the fact that it was another way iPhone users could pretend their device was cooler than any other, but that was never going to last. What it did do was build a critical mass of early adopters who would create a buzz about the product.

The cross-over to Android was inevitable, and the objections of the iPhone community were more comical than a real issue for its adoption. But the cross-over did indicate that Instagram would maintain an upward trajectory that would eventually challenge the dominance of Facebook in this space, in a way that Flickr and Picasa never could.
Facebook will probably allow Instagram to continue as both a stand-alone app and as an integrated tool within Facebook. The ability to apply Instagram effects to your entire repository of photos on Facebook will be very compelling to some, as terrifying as it may seem to the purist.

The backlash is symbolic of a deep-seated psychology of superiority among certain categories of technology users. In particular, the iPhone users who mourned its cross-over to Android don’t realise that, given it’s massive user base, there was nothing exclusive about Instagram to start with. Wanting to hold onto it as a single platform application is not only absurd, it is also childish and arrogant. If it worked for you as an iPhone user, it will still work for you once Facebook owns it. If you refuse to use it because it’s on Android and Facebook, it means you weren’t using it for its utility, but for the status it gave you. It is an idiotic approach to technology use, and there can be little sympathy.

Is it indicative of a bubble?

The Instagram purchase is more a factor of its stratospheric growth at a time when Facebook is preparing for a listing, than of a bubble as such. It is a case of Facebook defending its position as the world’s leading photo-sharing environment, and of making an obvious acquisition of the fastest growing player in this arena, rather than of Instagram in its own right suddenly having this high value. Time is tight for Facebook, prior to its IPO, and they obviously made an offer that couldn’t be refused, taking advantage of the current high value of Facebook shares.

Well then, is Groupon a bubble?

Groupon’s biggest mistake may well have been not accepting a similar offer-that-couldn’t-be-refused from Google and believing its own hype about how much it was worth. Although it has a market cap of above $8bn, versus that $6bn offer, it is unlikely they will be able to extract that value from the business. The market has already punished Groupon, and its share price is down to a low of near $13 from a high of $31 (Nasdaq data, 11 April 2012). That looks like fairly sane market response to a business that had previously been over-hyped. If we were in the midst of a bubble for group buying sites, that share price would be closer to its highs.

Of course, both the acquisition of Instagram by Facebook and Posterous by Twitter, not to mention Zynga buying the creators of Draw Something, will spark renewed fervour to come up with the next big app or platform that can be sold to one of the big guys. Every developer is looking for a big payday, and this just fuels the dreams, although in most cases not the reality.
Useful resources:

The Big Change
The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx. Visit our InfoCentre or website.

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