Insta-insanity: Why the Facebook Instagram Deal Makes No Sense

OK, so if we had nothing to do but instantly blog whatever we saw as relevant, we wouldn't appear late to the party (yeah, if you look, you read that right: ~822M attendees, er, search results for "Instagram+Facebook"). 

And in fact, we probably wouldn't have bothered to blather if it weren't for several (>3) of our clients inquiring today about the Facebook assimilation of Instagram.  "What does this mean for our social CRM strategy?"  "Does this make sense?"  Well, the short of it is we think:

  1. It probably doesn't mean much to your strategy, unless you were betting big on the 30M Instagrammers continuing to mushroom on their current growth curve to north of a 100M within the next 12 months, and
  2. The deal, IOHO, is just short of insane and amounts to nothing more than a "flip" and "liquidity event" for its investors (and co-founders).

Now, a couple of comments why we're playing wet blanket at this party.

"Hey, c'mon, Instagram is fun," you say.  Sure, its a kewl way for me to visually share my experiences with my friends.  Its dope they say.  Sure.  $1B worth?  That's dopey.  Let's review: Instagram claims ~30 million registered users.  OK.  It's free. Oh, and look: no pesky ads.  Um, in fact, its revenue-stream free. 

But since its 2010 launch Instagram has raised $57M, resulting in a paper-mache "value" of $500 million.  That's five hundred million dollars for a start-up venture without a business model.  And Facebook figured it was actually worth 2x of that!  Never mind buy-low and sell high.  The cheshire grins on the investors face are so bright you can't miss them in the middle of that ginormous party.

Here is where we think the insanity speaks for itself.  There are plenty of theories spinning about why Facebook exercised prudent business judgment here (don't worry future shareholders, Mark has promised to never do this again, or at least not very often).  BusinessWeek, in one article managed to lose our respect for their business accumen by suggesting its not a big deal for Facebook to spend a $1B to acquire 30M in audience.  Of course, that assumes a host of things (e.g., like the Venn of Instagram users and Facebook users is really small... actually it may be, and if so that's actually a bigger problem, read on.)

We actually think Om Malik is more on point with what really happened, suggesting Facebook was more in fear of Instagram and so took it out for a premium.  Remember: Instagram was doing what Facebook had failed to do: mobile photo sharing in an engaging manner.  Facebook is essentially about photos, and Instagram was quickly figuring out how to do it better.  Malik writes:

It has created a platform built on emotion. It created not a social network, but instead built a beautiful social platform of shared experiences.  Facebook and Instagram are two distinct companies with two distinct personalities. Instagram has what Facebook craves – passionate community. People like Facebook. People use Facebook. People love Instagram. It is my single most-used app. I spend an hour a day on Instagram. I have made friends based on photos they share. I know how they feel, and how they see the world. Facebook lacks soul. Instagram is all soul and emotion.

We strongly encourage you to read through Om Malik's article.  We think its spot-on.  But here is where the insanity hits the inflection point of its crazy curve: Om may be right (we think he is) that Facebook purchased a "passionate community," but that passion may start sounding like air escaping a released balloon.  Consider what the NY Times writes about this today, including pointing to a growing chorus of tweets and posts from disenchanted Instagrammers writing their "Good Byes" now that Instagram is becoming "InstaFacebook."

At the end of the day (as it is now, and time for cocktails by the way), we keep circling back to the more simple point, that frankly should have all of us alarmed... very alarmed:  Here we are, a decade past the dot-com Web 1.0 bubble, and a pattern is re-emerging of one over-valued company buying another, with no one held accountable for actually establishing a demonstrable business model and earn real money. 

You're fooling yourself if you overlook that what really happened here was a snappy Wall Street style liquidity coup.  Instagram is a kewl service, Om is right about that.  And its investors and co-founders have made off nicely, good for them.  But its insanity that a venture, with no business model, no revenue, and barely eight quarters old should be worth one billion dollars.  It signals the possibilty that no one has learned anything except to remind ourselves that this is all just a shell game for crazy profits awarded to a select few.

On the orther hand, we also agree with Om that perhaps in light of all of this, maybe Instagram sold too soon.  But the road from product, to platform, to a real viable business can be a long strange trip with plenty of opportunities to become road kill along the way.

Circling back to our client's calls and messages today:  Your Instagram social strategy where applicable just became a Facebook strategy, except that if the exodus occurs as the Times hints it may, then you're back to where you were before Instagram, except that kewl mobile photo sharing App is now the property of Facebook.  Why do we feel like we've been to this movie before?

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Gregory Miller, CTO

Greg has been in the tech sector as a software architect and engineer, product manager, marketing and biz dev exec., and even IP and privacy lawyer for 3 decades. He is currently on the Board of a non-profit tech foundation reinventing America's election technology, is a venture adviser in the Silicon Valley, and serves as the CTO for C[IQ] Strategies, Inc.