Facebook is paying $76.9m per Instagram employee
When Facebook announced on Monday that it was to acquire Instagram, a photo sharing application that employs just 13 people, it was bound to set some tongues wagging about the possibility
of another tech bubble.
Not that the deal is a huge surprise. Instagram — founded in 2010 — may be a small company, but its audience is estimated at over 30 million, all potential customers for Facebook as it tries to monetise the social network model.
"What they bought with Instagram was a photo app with high brand recognition and an enormous audience," said Ray Valdes, a research director at Gartner Inc.
Chris N. Fernando, managing editor of PC Magazine, told Gulf News that the acquisition does not point to a tech bubble, it marks the evolution and revolution of social media and the efforts to cash in on what is essentially a free service.
Facebook is looking to increase its revenue stream from mobile, Fernando said, and the acquisition is one step towards doing that. The company already receives a significant portion of its traffic from mobile, but it has not been able to make as much money through this platform.
But it was a high price to pay, Fernando says. To put the number into perspective, Yahoo bought Flickr in 2005 for $35 million (Dh128.53 million) less than five years after the dot.com bubble burst.
Given Instagram's employee base of 13, Facebook is paying $76.9 million per person for a company that has no publicly disclosed source of revenue. Facebook may seek an initial public offering valuation of as high as $100 billion, people with knowledge of the plans have said. At that valuation, Facebook would be worth $31.3 million per each of its 3,200 employees at the end of 2011.
"I think buying Instagram for a billion dollars is insanity," Fernando said.
"It may be worth $500 million. Facebook is unlikely to make the billion dollars back it used to purchase Instagram, but it will allow Facebook to be competitive in the photo sharing realm," he added.
Rebecca Lieb, an analyst at Altimeter Group LLC, agreed that owning Instagram may help the social networking giant to attract handset users and advertisers who target them, but it is difficult to see the tiny company's business model.
Zynga, for example, makes money selling access to of its games, which Facebook advertises to its hundreds of millions of members. Instagram has none of that.
But what it does have is popularity, Fernando said. The company has grown from five to 30 million users in the last 10 months and last week unveiled apps on the Android platform. It has attracted one million new users in just one day.
He said that Facebook, which already has integration with the photo sharing app, has just bought the competition to gain mobile and other technology. The purchase would also be perhaps a way to block arch-enemy Pinterest, a content sharing service that allows members to "pin" images, videos and other objects to their pin-board. The deal marks the first time Facebook has acquired a product and company with so many users, Chief Executive Officer Mark Zuckerberg wrote on his profile page. He also said he plans to let Instagram remain independent.
"We need to be mindful about keeping and building on Instagram's strengths and features rather than just trying to integrate everything into Facebook," Zuckerberg said.
"Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people."
But is this likely to be the first in a number of big-ticket acquisitions for Facebook over the coming years? Lieb thinks not.
"Facebook is not known for big acquisitions and I think this will probably be its first and last one," she said.