Why Facebook stumped up $1bn for Instagram

To paraphrase the punk band Anti Flag, 1-billion dollars “could buy a lot of bling”. Or, if you’re Facebook, it could buy you Instagram. But why did the world’s largest social network splash out so much for the photo-sharing app?

Is it because it’s so addictive? Has Facebook suddenly got penchant for vintage photo filters? Or is it more interested in digging its claws into the info Instagram has on its 30-million plus users.

According to tech research company Ovum, it may well be because Facebook’s own mobile photo-sharing service leaves a hell of a lot to be desired.

Principal analyst Mark Little reckons that:

The Facebook proposition is becoming fat, allowing sub-propositions like photo-sharing to get lost or become difficult to access. Currently the usability of Facebook for mobile photo sharing does not match the experience offered by Instagram and many other apps that are well-integrated with Android and iOS platforms. Facebook needs access to a better photo-sharing user interface to ensure it remains in control of an important type of shared content and the users that generate it.

He also says Facebook might be looking to sidestep the curse of its own popularity. What was once the preserve of tech savvy university now features demographics ranging from school kids to grandparents.

This, says Little, means that “Facebook needs new attractions to regenerate network effects and to continue to pull the younger demographic into its orbit.”

The analyst admits that the price may have been heavily inflated, but adds that it may have been driven by the social network’s competitors:

The price of $1 billion is certainly inflated in terms of the usual revenue multiples (Instagram has no revenue) but this will have been driven by Facebook’s main rivals and so the price tag also has an anti-competitive element driven by the cash piles of Apple ($100bn), Microsoft ($52bn) and Google ($45bn). Rather than a bubble, these “inflated” prices are perhaps better described as a temporary market condition centred around a limited number of acquisition targets perceived as valuable and driven by the cash of four high-rolling Internet giants.

Right, so there’s no bubble but there is a group of “high-rolling” internet players willing to bet big money on anything they think has the potential to be valuable. Sounds perfectly safe and reasonable.