Facebook's decision last week to pay $1 billion for Instagram, a company with a single product, no revenue and 13 employees, raised more than a few eyebrows in the world outside the dot.com and high-tech communities. The deal suggested to some that there is more money than sense floating around Silicon Valley. Those more familiar with the still esoteric world of social technology and mobile apps weren't so quick to accept that judgment. Many of those familiar with that world say that the investment in the startup likely will be a sound one.
That opinion is driven by recognition that Instagram's single product already is a game-changer. It is a free app that allows people to manipulate photos and share them with Instagram websites and other users. It has a wide following, too. More than 30 million people use it, a majority of them in the younger demographic that is accustomed, even addicted, to taking and sharing photos on their smartphones. That's a market hard to ignore, especially for companies, like Facebook, eager to increase revenue.
It's especially hard to ignore because the Instagram app allows users to work almost exclusively on mobile devises, bypassing computer-based applications. Companies like Facebook, for the moment at least, still are heavily dependent on the computers and are anxious to quickly move to the more fast-paced mobile world. It's $1-billion purchase of Instagram is a step in that direction.
The question, of course, is whether the purchase of a startup with no revenue but a popular following will pay off. Precedent says it could. Though Silicon Valley is littered with the carcasses of once high-flying companies, there are enough success stories to suggest that a $1-billion purchase is more an investment than a gamble.
A decade ago, eBay, already a successful online auction site, drew criticism for spending $1.5 billion to buy PayPal, a relatively unknown online payments company. Ten years later, PayPal, provides a huge chunk of revenue to the eBay company. That's not the only success story. In 2006, Google paid $1.65 billion for YouTube, the video uploading site that at the time had earned no revenue. Today, YouTube delivers significant revenue to Google.
No one can say with any accuracy if Facebook's purchase of Instagram will mirror those results. There's enough evidence at hand to suggest it might. Instagram users currently upload around 5 million photos a day. Those photos attract a lot of views and attention -- an estimated 650 or comments or ratings per second, according to those who track such things. That's a huge audience by any measure, and a particularly attractive one for advertisers who are anxious to win a foothold at a site to which millions are attracted, some would say addicted, for long periods every day. It's a market hard to ignore.
Facebook obviously believes Instagram provides it with both an entree to the mobile world and to the prospect of profits. First, of course, it will have to figure out how to make money from an app that heretofore has been free without driving away its millions of current users. That's a problem, though, that has been conquered before. Internet users have proved willing to pay for updated versions of once free apps. Rovio's Angry Birds is a case in point. It still offers free entree in some instances, but tens of millions of people have paid a fee for its premium applications without complaint.
The $1-billion price tag makes Instagram the latest dot.com startup to win widespread attention. Check back in a year or so to see if it still a viable company under the Facebook umbrella. Only then will it be possible to tell if Instagram is on the way to becoming another PayPal or YouTube, or another marker in the graveyard of Silicon Valley startups.