Yesterday Facebook announced the acquisition of Instagram photo sharing app for approximately $1 billion in stock and cash. While it seems to be a ridiculous amount of money for the company with one product and no revenue, in fact everything is a bit more complicated.It is true that Instagram generates no revenue and it probably won't start to. But in this deal Facebook is actually paying for users, not for the commercial potential. And Instagram has over 27 million users on iOS alone. This number can almost double in the future: new Android application released last week got 1 million new subscribers in 24 hours. So Facebook pays about $20-$40 per user. Compared to $100 price for user in Facebook (based on estimated valuation of $75-$100 billion and 850 million users), it doesn't seem to be a very high price.
Of course, the entire idea of company's valuation based on the number of users seems ridiculous. But today in tech industry users can be viewed as the most valuable asset. It is usually possible to find ways to monetize project if you have a community, but if you lose users, your company is dead. Besides, Facebook revenues on advertizing are growing every year, so it doesn't seem an issue that the new service won't make any money for some time.
Nonetheless, there is another potential problem with the acquisition. Mark Zuckerberg announced that Instagram will keep its brand and will continue to exist as a separate application. Many other companies use this strategy, but it is completely new move for Facebook, which has always been run as a single product. Is it a good decision to keep Instagram independent? We will see, but right now it doesn't seem a right thing to do.
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