Instagram - Value of Innovation

Many of you may have read or heard about Face book buying out Instagram for $1bn. Interesting deal!

I was reading some blogs on this and thought of consolidating and sharing some of the interesting insights to this deal.

What is Instagram:-

Simply put it is a mobile application which allows users to do some tricks on their photographs and share on Facebook, Twitter, etc. Another interesting fact is that it is an organization of only 12 developers.

Some basic financials:-

Facebook IPO is valued at $ 80bn. With a user base of 800mn, that means $100 per user.

Instagram has a user base of 33mn. So with a buyout of $1bn, it means that it is valued at $30 per user.

Questions:-

So why is Facebook paying $1bn for Instagram? Can’t Facebook develop the Instagram Application? Each of the 12 developers of Instagram would get approx $100mn; would they really be interested in working after that much money?

Answers:-

In all likelihood the 33mn users of Instagram are already part of Facebook. And Facebook definitely has the resources & power to build an application like or even much better than Instagram. But successful consumer product takes more than great technology.

The first product on the market has a big advantage; People get used to the product, invite friends and the growth cycle starts exponentially. And once the user community starts to grow exponentially they are not likely to switch to another product...even if it is better.

Technology can be replicated but not the timing and luck.

Mobile is the future and photos are core to Facebook. And Instagram is better than Facebook in both. And hence the deal is worth the price to Facebook.. though mathematically or numerically it may not make all that sense.

In a similar way, Google video did everything like hosting/sharing a video, but it could not really replicate YouTube. And eventually it had to buy YouTube for $1.6bn though technically it had everything in its Goggle Video.