Facebook Buys Instagram for $1Billion



If you didn’t know what Instagram was before, you’ve probably heard of it by now.  As of early April, Facebook’s young CEO, Mark Zuckerberg, agreed to pay $1 billion, which was split between 23 million shares of Facebook common stock, and $300 million in cash for the most popular free, mobile photo app available to download − Instagram.  However, the question stands, “Why?”  Why would Facebook, an online social networking website − which is used to connect people from around the world through common interests, buy out a mobile application?

As an avid user of Facebook and Instagram, I don’t understand the link between the two companies, nor how owning Instagram is going to be beneficial for Facebook users.

Facebook stated it would use Instagram as a “booster” to its existence as a mobile app.  As stated by Zuckerberg, “it is critical to maintain Instagram’s products as independent mobile applications to enhance our photos product offerings, and to enable users to increase their levels of mobile engagement and photo sharing.”

“I feel good about Facebook’s new buy out. I think this was a wise financial decision for Facebook in the long-run,” Justin Miles, Bloomsburg University Junior.

Facebook stated in the United States Securities and Exchange Commission Form S-1, that they have a significant opportunity to further enhance the value Facebook can deliver to their users with their five key elements:

-Expand Our Global User Community

– Build Great Social Products to Increase Engagement

– Provide Users with the Most Compelling Experience

– Build Engaging Mobile Experiences

– Enable Developers to Build Great Social Products Using the Facebook Platform.

The Form S-1 then continues to state, “We believe that mobile usage of Facebook is critical to maintaining user growth and engagement over the long term, and we are actively seeking to grow mobile usage, although such usage does not currently directly generate any meaningful revenue.”

Facebook also stated it will pay Instagram a $200 million fee if the government blocks the acquisition.  That noted, the Form S-1 states that the contract should close after June of this year, however, if the contract falls through due to government intervention or either party drops out prior to December 10, 2012, then Facebook will owe Instagram $200 million.

“If Facebook keeps Instagram as a mobile application without integrating it into the Facebook website, then I think it was a pointless acquisition,” stated Katie Mazol, Bloomsburg University Junior.

In the same filing, the company said its first-quarter earnings slipped 12%, as increases in the revenue rise and fall more than they’re compensating.

Facebook reported a $205 million profit, which is down $233 million from 2011.  The media sites profits jumped 45% up to $1.06 billion, leaving the total costs and expenses nearly doubled to $677 million.

With this all being said, I wouldn’t be surprised if either party drops out before December 10, 2012, or if in the long-run Facebook regrets buying Instagram.  Here’s why, if Facebook bought Instagram, with the hope of an increase their mobile application usage, then that doesn’t make sense to me.  Mainly because almost anybody with a smart phone or Ipod that can download apps, already had the Facebook and Instagram App downloaded and most likely uses either one on a regular basis. I don’t think the usage stats will increase a significant enough amount for Facebook to truly make a profit, especially since the Facebook and Instagram apps are FREE.

So, what is Facebook really gaining from their newly purchased Photo App − Instagram?