Opinion

Felix Salmon

Counterparties: Why Facebook bought Instagram

April 10, 2012

Welcome to a preview of the Counterparties email, a collection of the day’s very best links on finance and economics! The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

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

 

Comments
4 comments so far | RSS Comments RSS

Isn’t it interesting to speculate about how Facebook will make enough money to pay for this acquisition, since there is apparently no revenue stream whatsoever? Did Facebook just happen to have $1B lying around that no one was using? Or did they have to borrow the money? If the money was lent, did the lenders go on the assumption that because Facebook is a big hit, its operators can do no wrong in terms of expansion or investment?

If you had bought a piece of Facebook in 2004, the payoff would apparently be huge if you cashed it in now, but what are the odds that $1B now will yield a big payoff in the future?

Posted by ytwod3621 | Report as abusive
 

It gets even better: Facebook buys NY Times for $926 million: http://www.WeWereWallStreet.com/facebook -buys-nytimes.html.

Posted by WeWereWallSt | Report as abusive
 

Who the HELL uses ‘instagram?’ This sounds like fabricated news, and we’re all supposed to know the players. “Google Takes Majority Position in BombDog Platform.” I saw this coming when BombDog was upgraded before Q3 earnings.

Posted by AlkalineState | Report as abusive
 

They are all platform, which people use in ways that vary over time. The GigaOm writer now spends an hour a day on Instagram, believing it’s higher quality, because he follows fewer and more discerning people there than on Facebook. It’d be interesting for the writer to follow only the same people in Instagram and Facebook.

If Instagram gets 500 million users, including parents, teachers, employees/ers, the store down the street, and people I wish I’d forgotten, and a user follows all of them just like accepting too many Facebook requests, then the perceived quality of a person’s Instagram follows will quickly disappear.

There does not seem to be anything unique about the Instagram platform that might enforce the current quality. I’m sure people thought their Facebook walls were quality back in 2007. The ‘quality’ of followed Tweets was probably better before large-scale adoption by marketers, spambots and idiots.

tl;dr: things that are cool when they are small can be much less cool when used by the world. Would Grandma’s Instagram feed be any better than her Facebook posts?

It’s the poster, not the platform, that matters.

Posted by SteveHamlin | Report as abusive
 

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