Facebook’s purchase of Instagram for a massive $1 Billion has plenty of people guessing why the world’s largest social network would pay so much for such a young photo-sharing service. It was only a few weeks ago that Instagram was an iPhone-only app that enabled easy photo sharing between other mobile users. But just one week ago it landed on Android, and this week the acquisition by Facebook was announced. Despite some of the analysis out there, Facebook’s reason for buying Instagram is actually still a mystery, but we thought we would take a crack at some of the reasons why Facebook needed this particular service:

1. Facebook’s revenue from mobile usage is currently non existent. While Facebook’s usage from mobile devices is high, it is still arguably a larger-screen focussed experience. Instagram on the other hand, is a purely mobile focussed, finished product. This means that the users on Instagram only stick to their phones for sharing photos with friends, and Facebook may have known that this was a complete product that had the potential to create trouble for them later. The world is moving to mobile after all. 
2. Facebook is currently the world’s largest photo sharing site – but Instagram had a very fast growing, exclusive (iPhone only at one point) network which was becoming a threat to Facebook in the long run. 30 million users is a lot, but it is a tiny fraction compared to Facebook’s user numbers. But just like Facebook, Instagram has a very “sticky” nature to it, with users always coming back for more. Now those sticky users were not only posting to Instagram – many of them were posting to Twitter as well, which is arguably Facebook’s biggest competitor. Facebook will want to control that – but currently Zuckerberg states that Instagram will be kept “open” in that they will continue to interface with other social networks: “We plan on keeping features like the ability to post to other social networks, the ability to not share your Instagrams on Facebook if you want, and the ability to have followers and follow people separately from your friends on Facebook.” Only time will tell whether this will indeed be the case. My opinion – I think it is just a way to keep the Instagram fans happy for now.
3. While 30 million users is not a lot compared to Facebook’s user numbers, the Instagram growth was until now, limited to the iPhone userbase. The launch of the Android version will now increase that userbase at a massive rate. As Om Malik states – “It is pretty clear that thanks to the turbocharge effect of Android, Instagram’s user base is going to blast past the 50 million mark in a couple of weeks.” These growth figures are pretty much on par with Facebook’s early days, with the same potential for growth. Even if Instagram never reaches Facebook’s numbers, it is still a legitimate threat.
4. The harsh truth is that Facebook is so big that it can go ahead and buy any service that poses a small threat. While Instagram was not a direct competitor, its quick growing, multi-network nature means that it could easily empower other networks like Twitter, but also anyone who wants to use Instagram’s API. One can also easily predict that in the future Facebook will keep on buying (or at least make offers to) competitors, or services that have the potential to contribute to making its competitors better.
5. Robert Scoble makes a very interesting point – Instagram users tend to take photos of what they are passionate about. For example, a foodie will keep on taking photos of food. A mountain biker will take photos of trails and bikes. This is the exact area in which Pinterest does so well, which has quickly become the third biggest social network. With Facebook, this data has to be manually entered into “interests” inside Facebook. Currently Facebook’s usage in photos does not seem to center around the same passions – rather around people, and tagging those people. Now, if Facebook notices that you take pictures of wedding cakes, they can probably make some assumptions about you, and then market to you accordingly. That is worth a lot of money – potentially a lot more than the $1 Billion price paid for Instagram.

The truth of the matter is that almost none of these reasons seem to explain why Facebook paid such a massive amount. The price is inflated, but for Facebook it might be well worth it, especially if their upcoming IPO will probably make a lot more (currently projected around $80 – $100 Billion) than their Instagram “investment”. If there was ever an indication that we are moving to another tech bubble, this might be the closest yet.

But what do you think – why did Facebook need to buy Instagram?

Image: CultofMac