Inside Business

April 11, 2012 5:59 pm

Facebook has mobile in mind with Instagram

$1bn deal reflects new wave of apps beyond the web

Remember when it seemed crazy that Google was paying $1.65bn for YouTube? Thanks to the incredible leverage of the web, an online video start-up with only 65 employees had already amassed 20m regular users in less than two years – though it had nothing in the way of revenue to show for it.

From the vantage point of today’s app world, that already looks so … 2006.

Enter Instagram. The photo-sharing app’s numbers are more eye-opening than YouTube at the same stage. With only 13 employees, it has garnered more than 30m members in its first 18 months.

The revenue line may still be a big, fat “zero” – but that didn’t stop Facebook from laying out $1bn this week to secure an icon that enjoys prime positioning on mobile screens everywhere.

If the YouTube deal represented an early flowering of what used to be called user-generated content on the web, the acquisition of Instagram is a harbinger of another new wave: the app that lives beyond the web. It is a place where the influence of the traditional web powers – even one in the ascendant, like Facebook – is muted, and different rules apply.

It was less than four years ago that Apple ushered in this new world, with the launch of its App Store. The resulting app economy, without much revenue to show for itself, has been floated on a tide of venture capital. But acquisitions like that of Instagram are a harbinger of things to come. In a deal that was, in its way, even more eye-watering, social games company Zynga last month paid around $200m for the start-up behind a simple game called Draw Something: launched only seven weeks earlier, the game had already attracted more than 35m users.

The platform to support apps like this has come into being remarkably quickly. Apple had sold some 80m iPhones and iPads at the time that Instagram was launched: that number has since grown to 230m, and sales of devices using Google’s Android software have exploded. Add in the social network effects that many new services rely on, and this makes fertile ground for instant app phenomena like Instagram.

The speed with which they emerge and the simplicity of the experience makes it easy to write off such endeavours as small, ephemeral jewels. Yet Instagram packs a punch. As an alternative to importing their Facebook contacts, users can quickly build a new network of people to share pictures with – something that reflects a growing willingness of users to juggle different networks rather than export a single, homogenous Facebook experience to each new online service.

And, thanks to the strong emotional connection that comes from browsing through friends’ pictures, Instagram claims to have captured a surprising amount of its users’ attention.

How to make money from this will be a big question. Mobile advertising has been notoriously slow to take off. But image-centric services have an obvious appeal to brands that want to create an emotional connection with users. Like the image “curation” site Pinterest, Instagram is an obvious first port of call for brand-owners looking to test out future advertising formats that will mix in commercial messages with users’ own content.

So what does this $1bn deal say about Facebook? Coming the month before its expected IPO, it should give potential investors pause for thought. Facebook has always displayed a strong sense of paranoia – no bad thing, given the low barriers to entry in its industry – and has used other acquisitions in the past to latch on to new forms of online behaviour.

Buying Instagram is an admission that, while its own mobile app is used by hundreds of millions of people, Facebook was not built with mobile in mind. A complex, busy web service can’t hope to compete with the simplicity and delight of a purpose-built app like Instagram.

That also explains why many Instagram users are unhappy about a Facebook acquisition, and why Mark Zuckerberg has just picked a big management challenge. Reaching beyond Facebook into the app world demands a balancing act: keeping Instagram’s app-centric approach and alternative “social graph”, to use a term that Facebook itself popularised, while also using the app to extend its own network into foreign territory.

With this acquisition, Mr Zuckerberg has had to admit that Facebook doesn’t reach as far as he might like into the world of mobile apps. Writing on his Facebook page this week, he said: “We don’t plan on doing many more of these, if any at all.” Both he and the shareholders in his soon-to-be-public company will certainly be hoping he is right.

Richard Waters is the FT’s West Coast Managing Editor

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