On the surface, that’s a huge sum for a tiny start-up that has a handful of employees and no way to make money.
But the lack of a business model rarely dampens excitement about hot tech upshots these days. As Facebook has shown, itself without ads or revenue in its early days, money goes where the users are.
Instagram lets people share photos they snap with their mobile devices. The app has filters that can make photos look as if they’ve been taken in the 1970s or on Polaroid cameras. Its users take photos of everything from their breakfast egg sandwiches to sunsets to the smiling faces of their girlfriends.
In a little more than a year, Instagram attracted a loyal and loving user base of more than 30 million people. Apple picked it as the iPhone App of the Year in 2011.
Instagram’s fans, brand recognition and its potential are difficult to put a price tag on. Yet Facebook has and can afford it. The company is preparing for an initial public offering of stock that could value it at as much as $100 billion in a few weeks. What’s $1 billion? A drop in the bucket, really.
“Facebook after this IPO is going to be in a position to be predatory. They can make sure no one steps in their way and buy anyone who gets in their way,” said Wedbush analyst Michael Pachter, who follows social media.
Buying Instagram, he added, not only eliminates a rival but gives Facebook the technology “that is gaining crazy traction.”
Facebook is paying cash and stock for San Francisco-based Instagram and hiring its dozen or so employees. The deal is expected to close by the end of June.
It’s a windfall not just for Instagram’s employees, but the venture capital firms backing the company. Last week, Sequoia Capital led an investment round that valued Instagram at $500 million, according to a person familiar with the matter.
Going by the $1 billion price tag, Facebook is paying about $33 for each Instagram user. That’s a fraction of the $118 that Facebook investors will be paying per Facebook user if the company gets its expected $100 billion valuation after going public. By that math, Mr. Pachter said, $1 billon “doesn’t sound crazy.”
Getting Instagram is a big win for Facebook as it works to harness people’s growing obsession with their mobile devices and sharing every moment of their life. The company’s own mobile application is not as easy to use as Instagram, and sharing photos can be downright clunky. Facebook’s way, noted Mr. Pachter, has always been to buy technology if it’s better than what it can build on its own.
Facebook, which is based in Menlo Park, California, said it plans to keep Instagram running independently. That’s a departure from its tendency to buy small start-ups and integrate the technology or shut them down altogether just so it can hire talented engineers and developers.
“This is an important milestone for Facebook because it’s the first time we’ve ever acquired a product and company with so many users,” CEO Mark Zuckerberg wrote on his Facebook page on Monday announcing the deal. “We don’t plan on doing many more of these, if any at all.”
“We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience,” Mr. Zuckerberg said.