Why Instagram Is Worth $1 Billion (Or More)

Loren BurtonMay 09, 2012

Apparently people are still baffled about the Instagram acquisition. They can’t get over how a simple photo-sharing app could ever be worth $1 billion dollars. A free, simple, ad-less photo-sharing app without a business model to boot! This is craziness! Facebook has so much money they just want to give it away! We must be in a bubble, right?


First, let’s get our facts straight:

1) Instagram is not just a photo sharing app
2) The acquisition was almost entirely defensive
3) Facebook will probably never see an ROI on Instagram

With that, we can dig deeper.

Many people view Instagram as a means to share photos on other (more established) social networks. Turns out Instagram itself is actually a social network. Granted, there aren’t many features, but there are plenty of users – over 35 million at the time of acquisition. Based on that number alone, the $1BN price tag seems like a great deal in comparison to other acquisitions in the past decade. The flaw with this argument is that there is a likely a huge overlap between the Instagram userbase and Facebook userbase. Anyway, what matters is that Instagram is not just a photo app with filters – it’s a social network, which brings us to the next point.

Facebook didn’t buy Instagram because of some magical, futuristic technology that they just couldn’t figure out. They could have built that crap overnight. Facebook didn’t buy Instagram because they were desperate for 35 million more users that were already their users anyway. Facebook didn’t buy Instagram because it was raking in boatloads of cash and would provide a huge ROI someday. Nope.

Zuck was scared, so he snatched up Instagram to avoid another one of these situations. Zuck knew Instagram had the potential to become a huge competitor, and had he not acted quickly, it just might have. Zuck knows better than anybody that when a $1BN social network goes unacquired, it can become a $100BN company. Nobody likes dropping a billion dollars (I try to avoid it if I can), but Zuck did what he had to do when he saw Instagram as a threat to his baby. The cost of doing business, as they say.

Will Facebook ever see a return on their investment? Probably not – at least not directly. Arguably the Instagram acquisition has secured a higher IPO valuation, which could be construed as an inadvertent ROI, but that’s an entirely different story. No, Facebook paid $1BN for a photo-sharing app because that photo-sharing app was a legitimate threat to the future of Facebook. Oh, did somebody say Instagram didn’t have a business model? That sounds like a perfectly valid business model to me...

Well played, Instagram. Well played, Facebook.