What Am I Not Seeing About This Instagram Deal?
Here are the main arguments I’ve seen for why the Instagram deal makes sense for Facebook:
- Instagram was a threat to Facebook, primarily in that it was taking away time spent on Facebook.
- Photos have been a core part of Facebook and Instagram was no longer owning that space.
- The data that Facebook gets off Instagram is incredibly valuable.
- Remember when Google bought YouTube and everyone thought they were crazy?
I’ve been confused by the apologia of long-time tech pundits like Robert Scoble in this case as their arguments are presented as easily assumable truths, when, in fact, they’re anything but. Scoble recently posted an answer to a Quora thread wondering the exact same thing. It has 318 upvotes, so it’s worth looking at line-by-line:
Facebook has a problem. After its IPO completes it needs many quarters of strong revenue and profit growth to report to convince investors to stay put and convince new ones to buy the stock.
No argument here.
Zuckerberg is aiming at turning the $80 to $100 billion valuation that will happen at IPO into a $500 billion to $1 trillion company. How will he do that?
Look at mobile. That’s what.
Alright…
Today Facebook has NO revenues from mobile. None. That’s amazing, since so many people, hundreds of millions of us, use Facebook on mobile clients.
Alright…
That will change very quickly after the IPO. Instagram will play a huge role here, plus Facebook gets a very talented mobile development team that has built world-leading mobile apps on iOS and Android (which got a million users in its first day).
Whoa. So the company that also brings zero revenue to the table will play a huge role here? More than Facebook’s apps? How? It’s not that I’m entirely dismissive of this argument, but I’ve seen zero examples of how this actually shakes out in a compelling way. Inserting ads into a photostream is one obvious example — but how huge?
Not to take away from the team behind Instagram, but Scoble also ignores that Facebook already has a very talented mobile development team. They’ve been buying them left and right for the last few years: Gowalla. Sofa. Push Pop Press. The problem with Facebook isn’t a lack of talent — it’s that they’ve been unable to nail a product in a compelling way.
Let’s say that Facebook can turn on monetization on mobile clients. That could mean $500 million in revenue on first quarter, $700 on second, $900–$1 billion on third. Looking at it this way paying a billion for Instagram makes a LOT of sense.
I’m sure it’s going to be this easy. It’s unclear what part of the hundreds of millions in these hypothetical revenues are going to come from Instagram, but let’s do some rough math for a second, using these numbers from Flurry as a jumping off point:
- Assume Instagram has 100 million users by the end of next year
- Assume that they’re able to get CPMs of $3.00
- Assume that they’re able to show 10 ads per user per day
That’s a run rate of $1 billion per year — a significant portion of the money that Scoble outlines above! With that math of course the Instagram deal makes sense. But look at the assumptions we’ve made: what’re the odds that they’re going to fill that inventory at a $3.00 CPM? And what are the odds that they’re going to be able to show 10 ads to each user each day?
Think about it another way: Google made $2.5 billion in mobile advertising this past year. And that’s off of hundreds of millions of devices. Of course mobile ad rates are expected to go up, but it’s not going to be as easy as turning the imaginary switch labeled “REVENUE” that Scoble presumes the existence of. Back to Scoble:
Especially when you consider that the mobile team Facebook just acquired is going to be able to build a range of apps.
So you’re going to take the team that built a half-finished product and put them on other things?
But that’s just the beginning. Remember, Facebook is a new media company: one where the media comes to you based on what it knows about you.
Instagram adds some important new pieces of data to the Facebook databases:
- It knows who you like seeing photos from. That gets Facebook a dramatically better photo “graph.” That keeps it ahead of Google+, which wooed photographers strongly in its first seven months on the market.
Where’s the data on what this has been worth historically? I’ve been looking and can’t find it.
- It knows where you are when you shoot the photo. That is very important info for Facebook to know about you.
Where’s the data on what this has been worth historically? I’ve been looking and can’t find it.
- It shows a range of passions that you have. If you are a skiier, you take pictures of snow and skiing. If you are a foodie you take pictures of food at high-end restaurants. If you are into quilting, a lot of your photos will be of that. If you are into mountain biking, the same. Facebook’s databases need this info to optimize the media it will bring to you. This data is WORTH SHITLOADS! Imagine you’re a ski resort and want to reach skiiers, Instagram will give them a new way to do that, all while being far more targeted than Facebook otherwise could be.
Where’s the data on what this has been worth historically? I’ve been looking and can’t find it. Granted, I’ve been googling “shitloads” all morning so maybe I’m doing it wrong. Also: how is this more targeted? Once again, people have been uploading massive amounts of photos of the exact same types of things to Facebook for the last few years. Oh, and kudos to Facebook for building the technology that allows computers to detect if you’re eating at a high-end restaurant or not.
- Instagram will let Facebook develop a new kind of Open Graph advertising. One where Facebook will be able to offer mobile developers a lot of money in return for opening their apps up to Open Graph. Venture capitalists in Silicon Valley are slobbering over this new potential revenue stream, so having lots of VC buy-in (they just got a nice payday) will be very important. Imagine that Benchmark now “asks” all of its member companies to support such a new advertising scheme? This could result in billions of revenues for Facebook and member companies.
I don’t even know what this means.
And, there are probably a few more things elsewhere that this acquisition will do for Facebook.
Don’t stop now! Things were just getting interesting.
Look, the collective IQ of these companies — as a friend put it — is very high. I’m entirely aware that I may not be seeing the forest. But none of the arguments I’ve seen have made much sense to me. But here’s one interesting thing. Zuck himself seems to have some amount of skepticism of these types of deals based on his thoughtful comments about the purchase:
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. We don’t plan on doing many more of these, if any at all.
