Why $1 billion for Instagram is a good deal

Facebook just announced that has adquired Instagram for about 1 billion dollar, and the first reactions in social networks has appeared. Most comments argue that $1 billion valuation is too high, and try to show several metrics such as $0 revenues, or $83 million per employee. But we can look at several other directions that points out that $1 billion for adquiring Instagram can be a really good deal for Facebook.

First of all, look at photo sharing numbers at Facebook: 136.000 photos uploaded per minute, that’s over 200 million photos uploaded per day, and a total of 140 billion photos uploaded to Facebook. That’s really a lot of photographies in Facebook, and the reality is that Facebook Photos sucks. So uploading and sharing photos is one of the keys of Facebook’s success and one feature that engage users and Facebook has not been really designed to upload and share photos in a proper manner, and that’s why they needed to make an adquisition in the photo sharing segment.

And when you look for great photo sharing services, focused on mobile uploads (because most photos in Facebook are uploaded through a mobile phone), what great startups we can consider? There are a lot of players, but Instagram has been able to become the most important player in the segment, specially because it’s photo filters (that are awesome!), and its simplicity. In fact, Instagram numbers are really impressing: it become the #1 application in the App Store within 24 hours of launch (October 6, 2010), it holds the record as quickest app to reach 1 million downloads (December 21, 2010), and it surpassed 30 million users in early March 2012.

So, what’s Facebook buying for $1 billion? It’s not Instagram user base, because most Instagram users are also Facebook users. They aren’t buying Instagram because it’s a real competence of Facebook Photos, because numbers clearly show that Instagram is far away from photos shared in Facebook (1 billion photos uploaded to Instagram vs 140 billion photos uploaded to Facebook). Facebook is not paying 1 billion dollars for a trendy startup (that would be really stupid). The fact is that Facebook is buying the best photo sharing technology available in the market and the best team of engineers that would make possible for Facebook to improve Facebook Photos in order to transform one of the Facebook’s best features into a really useful tool.

Zuckerberg’s statement is clear about that:

But providing the best photo sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together.

And that technology and the team behind the technology really values $1 billion? It depends on how you want to evaluate the deal, but if we analyze the statistics, we notice that, this year, Facebook’s users will upload over 100 billion photos, and if we forecast these numbers (and the growth rate) for the next 10 years, we are talking over 2000 billion photos, so it means that Facebook is paying 0,05 cents per each photo uploaded to Facebook in the next 10 years (that’s not a lot of money).

We should also address another important topic related to Facebook: it’s battle against Google. Facebook is trying to provide the best possible (and integrated) web experience to their users, and if Facebook users want to upload and share photos, giving them the right tools, will engage those users, and will make it easier for Facebook to become “the Web” for most users. Facebook is trying to be a web sandbox where most users have everything they need (mail, photos, games, etc.). Most Facebook services excede the needs for a medium user, but photo sharing is almost the only service that can be totally reinvented in order to fulfil user’s needs.

Facebook is paying a lot of money for Instagram, that’s right, but I’m sure it’s a really good movement, and in a few years Facebook will be able to show that it has been one of the best adquisitions Facebook could have done.