Facebook Acquisition of Instagram the Likely Beginning of Its End

Is Instagram worth the $1 billion Facebook is paying for the company? Almost certainly not.

However its millions of users, rapid growth and massive valuation after its just-last-week $50 million Series B round gave the company serious leverage in negotiations with Facebook and allowed it to audaciously open with a demand for $2 billion, according to the Wall Street Journal:

Negotiating mostly on his own, Mr. Zuckerberg had fielded Mr. Systrom’s opening number, $2 billion, and whittled it down over several meetings at Mr. Zuckerberg’s $7 million five-bedroom home in Palo Alto. Later that Sunday, the two 20-somethings would agree on a sale valued at $1 billion.

People have speculated that the acquisition is largely defensive and I agree. Instagram was and is a mobile Facebook substitute for some people, especially tweens and younger teens. I’ve seen this first hand.

Chart/Poll: WSJ

One could argue either that it was smart or foolish for Zuckerberg to buy the app. Smart, because Facebook was in my view vulnerable over the long term to Instagram and other startups like it. Foolish, because the site was not truly worth $1 billion, nor is it likely to even be around in several years.

Google bought YouTube for $1.65 billion. It was and still is the leading video site by traffic; and Google has been able to monetize it with a mixture of display ads and video pre-roll. It was a brand advertising play that complemented Google’s other assets at the time. I don’t see Facebook having any kind of plan or being able to similarly exploit Instagram over the long term.

My daughter and her friends, avid Instagram users, are now worried about the fate of their beloved “Insta” and don’t want to upgrade the app to avoid Facebook “getting control” of their accounts. (At 12 she already considers Facebook a malevolent force.) Yet it’s very likely that her and her peer group’s fears will be realized and that the app will become more tightly integrated with Facebook and partly rebranded.

If Facebook invests in Instagram it risks detracting from its own mobile experience. If Facebook simply maintains the app Instagram will likely lose momentum over time. A year or two from now the app will probably be around but without the excitement and momentum.

In a majority of cases when startups are acquired by larger companies they eventually go into decline; the wind goes out of the sales. That will likely happen to Instagram too.

I could be proven terribly wrong but it seems to me this is the high point for Instagram before it begins what almost certainly will be its slow decline.

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5 Responses to “Facebook Acquisition of Instagram the Likely Beginning of Its End”

  1. Swapnonil Mukherjee says at

    The same thing happened with Flickr didn’t it?

  2. Greg says at

    One could certainly make that argument. 

  3. earlpearl says at

    Its great to start the negotiations with an opening price of $2 billion!!!!!

  4. Greg Sterling says at

    Imagine the “cohones”

  5. Instagram, Facebook and Media Controversies Lead on Social Media | Social Media Blog Sites says at

    […] “I could be proven terribly wrong but it seems to me this is the high point for Instagram before it begins what almost certainly will be its slow decline,” predicted Greg Sterling at Screenwork. […]

  6. Steph says at

    “I could be proven terribly wrong but it seems to me this is the high point for Instagram before it begins what almost certainly will be its slow decline.”

    Feel different now? 🙂

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