Counterparties: Why Facebook bought Instagram

April 10, 2012

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By now you’ve heard all about Facebook buying the two-year-old photo-sharing app Instagram for $1 billion. In the process, Facebook made Instagram’s handful of employees and investors filthy rich, pissed off Internet nerds and made the front page of the NYT and the WSJ.

Commentators like Dan Primack have argued that this was a defensive acquisition: Facebook was simply buying up its biggest competitor in the photo-sharing space. It’s also completely reasonable that Facebook, built on the browser, as Robert Scoble and Jenna Wortham note, was making a play for the growing mobile-web audience.

But there’s something else going on here. Om Malik, who says he spends “an hour a day on Instagram,” is on to something when he says Instagram is built on the vagaries of human emotion:

Instagram created not a social network, but instead built a beautiful social platform of shared experiences

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.

But what if Malik’s “soul” is really just another word for quality?

Instagram just may be the first company that’s figured out the quality problem with user-generated content on the Web. This is bound to be incredibly appealing to advertisers, who are increasingly moving away from static news and content and into the social-media space. (Just ask BuzzFeed.) Compare an Instagram feed (here’s a hacked-together link to mine; I’m not a photographer, but Instagram somehow makes me better) with what’s being uploaded to YouTube and written on Twitter or even with photos shared on Facebook itself.

Would you rather run your ad next to an artfully sepia-toned photo of a cityscape or in the comparatively messy worlds of Facebook, Twitter or YouTube? You don’t need to be Don Draper to see which is more appealing.

Facebook certainly knows how to target ads to its audience’s interests, but as we all know by now, Facebook users post any number of boring, self-interested or otherwise forgettable updates (this happened roughly when your parents joined). Instagram photos, as Jack Shafer suggests, are simple and frequently brilliant.

Instagram has not yet tried to bring in any revenue, but I’m not sure that matters in valuing the company. Instagram’s growing audience of some 30 million people may end up being more valuable on a per user basis than Facebook’s. The conventional wisdom that Facebook sees Instagram as competition is not the whole story. It may also see Instagram as having particularly advertiser-friendly content that its own users currently have trouble producing.

Think of it as a $1 billion way to make your parents’ status updates more interesting.

And on to today’s links:

Remuneration
Instagram’s CEO will reportedly earn $400 million from Facebook sale – Wired
Zynga spent $1.2 million on home security systems for its CEO – WSJ
@Om: “Facebook lacks soul. Instagram is all about soul – GigaOm

Must Read
Home again in Mexico: Illegal immigration to the U.S. now at “net zero” – Christian Science Monitor

EU Mess
Spain will now be playing the part of an EU country caught between rising borrowing costs and austerity – WSJ
European companies now borrowing more from the bond markets than they are from banks – WSJ

Alpha
Last year, 60 percent of hedge funds lost money in a flat market – Fortune

UGH
“Shadow banking” can get you a death sentence in China – Bloomberg

Regulatory Inertia
Ed DeMarco is still not ready for principal write-downs – HuffPost

Deals
Why Facebook’s purchase of Instagram was an act of panic – Fortune

Reuters Opinion
Instagram is taking media to a “post-verbal, post-textual” place – Jack Shafer
The Europe debate – Felix
Eliminating 100 million tax returns – David Cay Johnston
World Bank wackiness explains U.S. odd choice – Rob Cox

Tax Arcana
An argument that Obama is going to let all of the Bush tax cuts expire – Bloomberg
The White House unveils its Buffett Rule proposal for taxing the rich – White House
The Buffett Rule is arguably not that consequential – Bloomberg

Transitions
Private equity not that private anymore – and it’s growing up – The Deal

Dismal Science
Issues on which economists can agree, but most of us can’t seem to – The Atlantic

Long Reads
One woman’s epic journey from homeowner to living in a tent in Hawaii – ProPublica

Helpful Reminders
“It’s important to remember that internet commenters are the scum of the earth” – Josh Barro

Takedowns
A glorious shredding of modern Internet company accounting – Grumpy Old Accountants

Apropos of Nothing
North Dakota “sovereignist” doesn’t like it when unmanned drones stop him from stealing cows – U.S. News & World Report

 

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