Special Feature: Instagram Now Belongs To The Billion Dollar Club. Did Facebook Overpay?

Facebook buying Instagram out for $1 billion is the biggest acquisition in the Tech world this year. What was surprising was not the fact that Facebook bought the company but rather the fact that it bought the app for a billion dollars. The amount of money shelled out by Zuckerberg led to some intense online discussions, tweets and articles. Was shelling out this kind of money for a photo sharing app justified?

Co-founder and CEO Kevin Systrom started working on Instagram (which came out of an app called Burbn) primarily to leverage the ‘location’ buzz that was going with services like Foursquare. After noticing that more and more people were using the app not to check in but to upload photos of their daily lives.  Systrom thought of launching Instagram exclusively for iOS in October 2010. The Instagram app gained lot of popularity over the last two years. With Instagram releasing for Android last week, Android and iPhone have nearly settled into full featured competing mobile OSs.

According to many people, Instagram has 8-9 employees while some say that the actual number maybe 12-13 but no one knows for sure right now. How do you figure out the valuation for a 10-13 people company who are working on an app which has no revenue model but has millions of users? Things become fuzzy at this point. Everyone agrees that the app is splendid but where is the revenue? Facebook is no stranger to this party. In the early years no one knew how to monetize the social network and holding off the revenue making train has worked beautifully for them now when it files a $5 billion IPO. You can argue that Facebook is a whole different ball-game when it comes to social networking. It has so many possibilities and potential uses.

Instagram, on the other hand is just a photo-sharing app! Facebook and Instagram are not so different when you compare the virality that both achieved in the early years of their operation. Instagram has nailed mobile whereas Facebook is still figuring out that aspect. They have listed Mobile as a liability in their IPO filing. Acquiring Instagram makes sense in this aspect.

In terms of the cash Facebook paid for the service, we agree that a $1 billion doesn’t really make sense in the conventional way but it doesn’t really matter. Facebook clearly saw value in Instagram and bought it. Isn’t this the same principle on which Luxury markets and products operate? Facebook runs the slight risk of the network being past its prime anytime a new social network comes along. Protecting itself by buying out innovative services is a good thing for the company.

What are your thoughts on this acquisition? Share them with us.

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