Very interesting that Facebook spent $1,000,0000,0000 on Instagram. A company with few employees and no revenue. In fact I would call this a head-scratching move. I understand the concern with Facebook struggling to capture revenue in the mobile space. (Google is the #1 revenue generator in mobile followed by Pandora.) I also realize there is a patent issue here. But still $1 billion for a company with zero revenue? Wow. To put things in perspective Pandora, with over 50 million active users and the #1 downloaded iPhone App generates less than $200,000,000/year in the mobile space. To make matters even more interesting they actually have a local salesforce.
Unless Facebook has a strategy to quickly integrate Instagram and monetize the product, and given Facebook’s scale and know-how this is a real possibility, this would acquisition seem to indicate one of two things.
1) A defensive move. Most likely scenario is that Facebook saw a future competitor and wanted to take them out while they still could. This, combined with the patents and talent being acquired made this an acceptable deal for Facebook. Note that Facebook has had little luck breaking into competitive spaces with new product launches (remember Facebook Deals?) making this motivation for the acquisition even more likely as Facebook would seem to be better off buying companies than building their own new products and one-offs.
2) Nefarious motives. Let’s chalk this theory somewhere between Occupy Wall Street conspiracy theory and the US didn’t actually land on the moon conspiracy theory. Question is how many of Facebook’s active investors have cash in Instagram? (Answer: A few but not a smoking gun.) Still with many of them set to make a hefty ROI on Facebook’s $100 billion IPO why not pressure Facebook to pump 1% of the IPO cash into a secondary investment (in this case Instagram) furthering the ROI of these investors as they make a hefty return on Facebook and also get a 2x valuation on Instagram? Meanwhile the bill is paid by mom and pop’s 401k which automatically invests in Facebook at the IPO. Again, nefarious motives, but not too outlandish when you consider the power brokers at play.
Bottom line. It’s hard to believe that a company that has never earned a dollar is worth $1billion. It’s hard to imagine that Instagram itself will ever generate enough revenue via traditional metrics to justify the valuation via traditional finance multiples and it is a very steep price to pay if the value only represents opportunity cost. Still it is a price Facebook is able to afford and if nothing else it reflects that Facebook will be very aggressive in protecting its position at the top of the social media universe.