Some 18 months after launching, it reaches 20m users and may be on the way to owning its category. An established internet giant, which has been trying to break into the same market, jumps in with a takeover offer worth more than $1bn – even though it’s not clear how the start-up will make money. With a market value that has soared to over $100bn, though, the acquirer feels it can afford the risk.
No, this is not Facebook buying Instagram – but the parallels are striking.
The start-up in question, of course, is YouTube. Google’s $1.65bn acquisition in 2006 was an admission that its own attempt to break into online video had failed. Fortunately, it could afford to back the best horse in the race instead.
Facebook’s willingness to put down $1bn for Instagram suggests it is making the same bet. The sheer size of Facebook’s user base means that when it comes to photo sharing, or the use of its mobile app, it dwarfs much of the competition.
But the absolute numbers mask a truth that is hard to ignore. Facebook was born on the Web. Its smartphone app looks clunky and overwrought compared to the simplicity and ease of use of something like Instagram, which was born in the app world. When it comes to capturing, sharing and building networks around images, Facebook’s acquisition is an admission that it doesn’t come close to matching Instagram.
Like Google after it bought YouTube, Facebook promises it will keep alive Instagram’s brand and distinct feel, and that it will run the unit “independently.” But there are a number of differences between these acquisitions that bear thinking about:
Destination site. YouTube may have had its copyright challenges, but there was clear potential in a site that could become the dominant destination for online video viewing. Instagram is different: many of its users capture pictures with its app but then pass them on to other social networks, shifting the sharing function off its network.
Advertising. Facebook has yet to prove that it can find an advertising format that will fit the small screen of a smartphone. That task just became a lot more urgent now it has a $1bn mobile-only app to justify. It has taken Google years to generate meaningful revenue from YouTube: turning Instagram into a paying proposition could be even harder.
Cash. Google paid for YouTube entirely with stock, but Facebook is paying out cash as well as stock. The amount of cash involved has yet to be disclosed. It may be that Facebook’s shares are hard to value in the run-up to its expected IPO next month, but details like this are often telling: shareholders who take cash are expressing a preference. If the founders or key employees take cash, it is often a sign they will not be around for the long haul – a potential negative for Facebook, which has used acquisitions in the past to attract senior talent to the company.