So what exactly did Facebook buy for a billion dollars?

This morning’s Observer column.

So Facebook has bought Instagram, a company with a single product – a photosharing app – for $1bn in cash and (FB) shares. Just to put that in context, Instagram has been in existence for 18 months, employs 13 people, has 30 million users and has had a grand total of $7m in investment funding. Oh, and it has precisely zero dollars in revenue.

Sound familiar?

There’s been lots of really interesting commentary about the Instagram deal. Writing in the FT, John Gapper made two interesting points:

  • The deal looks much more like the kind of thing companies do after they go public and start to run out of steam. The fact that Instagram was snapped up (if that is the right way to describe paying a billion dollars for something) is a measure of how scared Mark Zuckerberg has become of what might happen to facebook.
  • What’s he scared of? Well, says Gapper, scared of repeating the fate of many earlier Internet poster-children (like Bebo, for which AOL paid $850m in 2008 and flogged off in 2011 for $10m).
  • And Frederic Filloux, one of my favourite commentators, is also sceptical about the deal — and about facebook generally. “When I read the news of the Instagram acquisition”, he writes, “I wondered: Imagine Facebook already trading on the Nasdaq; how would the market react? Would analysts and pundits send the stock upward, praising Zuckerberg’s swiftness at securing FB’s position? Or, to the contrary, would someone loudly complain: What? Did Facebook just burn the entire 2011 free cash-flow to buy an app with no revenue in sight, and manned by a dozen of geeks? Is this a red-flag symptom of Zuckerberg’s mental state?”

    Other points Filloux makes:

  • Zuckerberg controls 57% of facebook shares, and therefore can do what he likes. This can be a mixed blessing.
  • Zuck is beginning to look like Bill Gates in the early years of Microsoft’s dominance — the years when he decided that Netscape had to be eliminated. Every challenge is seen as a potential threst. Only the paranoid survive, etc. etc. Facebook’s photo-sharing dominance was beginning to leak, and Instagram was one factor in that. So it had to be acquired or destroyed. “With this transaction”, writes Filloux, “the ultra-dominant social network acted like an elephant scared of a mice. Instagram has 35 million users? Fine. But how many are using the service more than occasionally? Half of it? How many are likely to switch overnight to a better app? Most likely many will. Especially since Instagram is not a community per se, but a gateway to larger ones such as Twitter and Facebook.”
  • LATER: Andy Baio has made an interesting attempt to work out an empirical rationale for the price Zuckerberg paid for his new toy.