Assessment Tasks Case Analysis:FACEBOOK’S ACQUISITION OF INSTAGRAM
Consider this unlikely snapshot: A recent start-up with less than a dozen employees distribute a free app that allows consumers to retouch photos on their mobile phones and share them easily with others on social network platforms. The company has no real revenue stream, but the app has 30 million users and the firm was valued at $20 million last year (2011) during a venture capital funding round. Enter Facebook, which offers the start-up — Instagram — $1 billion as a purchase price.
Facebook on April 9, 2012, announced a billion- dollar-deal to buy the start-up behind the wildly popular smart phone photo sharing application Instagram. The big-ticket purchase was seen by some as a move by Facebook to strengthen the defences against Google and blazingly hot new comer Pinterest in the weeks ahead of what promises to be a history making stock market debut.
“For years, we have focused on building the best experience for sharing photos with your friends and family,” Facebook cofounder Mark Zuckerberg said in announcing the deal. Zuckerberg called the acquisition “an important milestone for Facebook because it is the first time we have ever acquired a product and company with so many users” but promised it was a rare acquisition. Don't use plagiarised sources.Get your custom essay just from $11/page
Instagram is one of many apps that allow for creative alteration and sharing of images. So what sets it apart? Simplicity is one element: It enables users to apply instant filters to accomplish effects that would take considerably more effort using other programs. “The product is unique,” says Karthik Hosanagar, the Wharton Operations and Information Management Professor. He also adds “Lots of consumers take pictures on their mobile devices, but the share rate for those pictures was low because these pictures … looked mundane. Instagram changed that by making these pictures novel and a better candidate for sharing. They addressed the [fact] that people like to share pictures of where they are, but want to share something that looks worthy of sharing.”
Another Wharton Operations and Information Management Professor Eric Clemons notes that “Increasingly, young Facebook users are blurring the distinction between a real camera and an iPhone camera, if you shoot with a digital SLR, you process your photos in Photoshop before you upload to Facebook. But if you shoot with an iPhone and upload directly, then you can’t do any processing. Instagram lets you process your photos, and Facebook is a logical owner.”
“Instagram has built a sizeable mobile photo sharing community,” said NPD analyst Linda Barrabee. “Clearly the value proposition of Instagram’s offering is a solid fit for Facebook.” The free mini program lets people give classic looks to square photos using ‘filters’ and then share them at Twitter, Facebook or other social networks. Apple crowned Instagram its app-of-the-year for 2011.
“We are psyched to be joining Facebook,” Systrom said in a message at the Instagram website. “It’s important to be clear that Instagram is not going away,” He continued. “We will be working with Facebook to evolve Instagram and build the network.” Facebook users flood the world’s largest social network with images to share with friends, but the website hasn’t proven to be an ideal stage for organizing pictures around topics-a forte that has made Pinterest a star.
“Facebook is pushing into the Pinterest space,” said analyst Tim Bajarin of Creative Strategies. “The thing about Instagram and Pinterest is that they are really interesting in the context of posting pictures around topics,” he continued.
Silicon Valley analyst Rob Enderle said that Facebook is building a defence against Pinterest which has been luring people’s attention from the social network. “Instagram is a reasonable competitive hedge against Pinterest,” Rob Enderle said. “At the heart of both start-ups is picture indexing, they are just handled differently.”
So, what does Facebook get for a billion dollars? According to Hosanagar, in addition to taking out a potentially big competitor in photo sharing, the company will gain “a firm hold in the mobile environment where it is more vulnerable” — and was therefore probably more willing to pay a high cost now “rather than later when the cost could be even higher.” Wharton operations and information management professor Eric Clemons adds that “Facebook needed some of Instagram’s functionality, and Instagram is worth much more to Facebook than it is alone. It makes sense for Facebook to add this capability. It is probably worth hundreds of millions to [them].”
“Clearly, Facebook as well as the Instagram founders felt that the market opportunity was big,” Hosanagar says. “At the end of the day, Instagram’s bankers and management did a great job, and I suspect that they probably created a nice bidding war for [the company].” Still, he views Instagram as “a novelty today. For me, it was unclear how long it would last and how it would be monetized. So I feel the price was just too high.”
While Bajarin referred to the billion-dollar price tag for Instagram ‘boggling’, Enderle contended that it could prove to be a bargain if it helps Facebook shine for its IPO on Wall Street. Facebook in February filed for a stock offering and could raise as much as US $10bn in the largest floatation ever by an Internet company on Wall Street. Facebook-the leading social network in all but 6 countries notably China and Russia-claims more than 845mn users. Facebook’s value has been estimated between US$ 75bn and US$ 100bn.
“The Instagram buy could be worth tens of billions of dollars if it holds off Pinterest and Facebook remains on top.” Enderle said.
“Given what Facebook is trying to do-get a massive valuation when it goes public-a billion dollars is a trivial sum.”
Facebook likely wanted to keep Instagram out of the hands of rivals such as Google while at the same time ramping up mobile offerings as people increasingly weave smart phones and tablet computers into lifestyle, according to analysts
Sources: Adapted from the following
- http://knowledgetoday.wharton.upenn.edu/2012/04/facebook-and-instagram-how-much-is-apicture-worth/
- http://www.forbes.com/sites/anthonykosner/2012/04/15/facebook-wants-to-be-your-mobile-appprovider-instagram-is-just-a-1-billion-objec
- t-lesson/http://www.bbc.co.uk/news/technology-17658264