Was Instagram Worth $1 Billion Dollars?

Shortly after Facebook announced that it had purchased new-media-re-working-of-old-media start up company Instagram, myself and Sunny Kotak (and with contributions from Abdiaziz Muse) wrote the following paper, submitting to BPP Business School, London, for which we received distinction.

 

Was Instagram Worth $1 Billion Dollars?

By Daniel Barker and Sunny Kotak

(contributions from Abdiaziz Muse)

In 2004, Facebook unveiled itself to the students of Harvard University as an interactive social networking website that allowed students to create their own profile filled with their own personal details, and look at their fellow students’ pages also. In 2006, Facebook, or The Facebook as it was then known, expanded beyond the few universities it was being used in, and allowed anybody with an email address to create an account (Guardian, 2007).

On Monday April 9th 2012, Mark Zuckerberg, CEO of Facebook, announced to the board and the world that the social media juggernaut had purchased the 515 day old mobile photo sharing company Instagram, for a staggering $1bn. The deal sent shockwaves through the cyber community, as this had been Facebook’s largest acquisition to date, reasons for which many critics are still pondering. The purchase may have been for Instagram’s mobile user-friendly platform, an area that Facebook has struggled with in making the transition from its web-based format to its mobile presence, and maybe this acquisition will help with this problem (New York Times, 2012). Some suggest that the deal was made to settle nervous tension with potential investors before Facebook opens up to the public later this year. Instagram could be a potential threat to Facebook’s social network platform, with their user base growing rapidly, boasting 30 million iPhone users and another 10 million on the android platform which, combined with Instagram being offered $60 million by venture capital firm Sequoia, the potential threat, or Facebook’s panic into buying each Instagram user for $28, could well be the reason behind the purchase (BBC, 2012). Some suggest that Facebook’s buyout was to secure their high stock value before they float later this year. The takeover would ease the nerves of potential investors; the scepticism is because of Facebook’s lack of movement in the mobile industry.(Telegraph, 2012). There is also a suggestion that Facebook acquired Instagram for its intellectual property, i.e. their patents and user interface.  There are various reasons why Instagram was acquired, although none of them give the concrete reasons. It may help to look into what they are to give us a clear idea on how Facebook will use the capture of Instagram to their benefit.

There is an argument that suggests that Facebook may have purchased Instagram after learning that venture capitalist firm Sequoia were interested in investing $60 million into the company (Bloomberg, 2012). The suggestion seems to have much merit according to sources, as the Instagram platform would then have the capital that could allow them to move into the social networking realm (Forbes, 2012). Furthermore, Instagram’s android release, which led to 1 million downloads in 24 hours, shows both the popularity and demand for this application which could have forced the purchase and the price of Instagram by Facebook; the deal would also secure their position as the market leader as Facebook likely felt that they had to buy-out the potential threat that they faced from Instagram. Facebook is going to be released into the public market later this year, thus suggesting that the manoeuvre was a defensive one, and had Instagram still existed independently from Facebook, this may have unnerved some potential investors, as Instagram would of have been available for purchase by one of Facebook’s competitors, such as Google and Twitter (Telegraph, 2012).

Unlike Facebook, Instagram is a platform popular with mainly young and otherwise technologically adept people, whereas Facebook is more generally popular, over a broad demographic (CNET, 2012). Therefore, it is reasonable to suggest that Facebook was trying to garner some more “hip” young users; however a more likely explanation is that the acquisition is due to corporate rivalry. Instagram is currently growing twice as fast as Flickr (DigitalBuzz, 2011), Facebook’s main rival in the online photography business, and subsidiary company of Yahoo!, a company with whom Facebook is currently engaged in a patent war. Further, it could be extrapolated that the acquisition could fend off potential threats from Google and, perhaps, even Twitter. In 2006, Google purchased YouTube, the popular video sharing website (BBC, 2006). In 2007 Facebook introduced video sharing alongside its existing photo sharing capabilities (Facebook, 2007). In theory, if Facebook were to expand their video sharing capabilities using the existing Instagram framework, they would immediately posses a video sharing network available to 800 million users worldwide. Add to this YouTube’s clunky mobile presence, and Instagram’s ease of use, Facebook would then have a formidable rival to the whole YouTube platform.  Furthermore, it would not be considered a “giant leap” if one were to theorise video micro-blogging in the near future. According to the Guardian (2011), as of November 2011, Twitter has just over 200 million users. If any company were to succeed in introducing cross platform video micro-blogging then, down to sheer numbers, Facebook would likely be the victor.

It can be argued that, as time went by, and as Facebook has grown; its complexity began to scare users. This is not uncommon in the technological world, however with a large percentage of Facebook’s users aged 55+ (CNET, 2012), it is not an issue that Facebook can afford to ignore. Add to this a large number of complaints from both iOS and Android users about Facebook’s own mobile app, and an air of discontent can clearly be seen with regards to Facebook’s own mobile presence (Forbes, 2012). Conversely, Instagram’s single point entry and ease of use is particularly enticing for those users, so an Instagram/Facebook pairing, on the surface, looks to be a step in the right direction for its mobile users as a whole.

Some have suggested that Facebook’s acquisition of Instagram is due, in part, to Instagram’s patents, however there are two problems with this suggestion. Firstly, according to the United States Patent and Trademark Office (USPTO), neither Instagram, nor its two founders, Kevin Systrom (CEO) and Mike Krieger, have ever been awarded any patents. Secondly, if Facebook was looking to spend $1 billion on patents, it would not be buying a start up company which, if it did have any patents, would only have a few. Rather it would do something akin to Microsoft’s recent purchase of 800 patents from aged technology giant AOL, for $1.3 billion (New York Times, 2012). The idea that Facebook was purchasing Instagram for its patents does make sense when you consider that it is currently engaged in a patent war with Yahoo!. Yahoo!, who own, among other companies, Flickr, the social networking site based around photography, are suing Facebook for unspecified damages relating to its alleged infringement of 10 of its patents (New York Times, 2012). Had Instagram had any patents relating to digital or mobile photography, or the storage or publication of pictures via an Internet medium, then this acquisition would have been particularly useful for Facebook. Many large technology firms, who are engaged in patent wars, use their vast cash reserves to buy large amounts of patents from companies, such as Microsoft’s recent purchase from AOL, or, indeed, buy out entire companies just to own their intellectual property, in order to counter sue the company already suing them for patent infringement. An example of this can be seen in Google’s 2011 acquisition of Motorola Mobility, where they spent $12.5 billion on buying out the entire company, in order to protect themselves against lawsuits brought by Apple and Samsung (Telegraph, 2012). As a result of Instagram’s complete lack of patents, it is clear that Facebook’s payment of $1 billion was clearly driven by a different factor, however, considering its relatively vulnerable status, due to its current IPO position, it begs the question; why didn’t Facebook spend $1 billion on patents it could use to kill the Yahoo! lawsuit, before the lawsuit affects the company’s stock price?

Among the patents owned by Yahoo! inc., allegedly being infringed by Facebook, is US patent number 7,599,935, “Control for enabling a user to preview display of selected content based on another user’s authorization level”, which states that Yahoo! inc., owns the patent for the procedure which would enable “a first user to preview content as it would be seen by a second user, if the second user had a selected user relationship with the first user” (USPTO, 2009). This particular patent is particularly all encompassing, and will be a hard one for Facebook to rebut. One way for Facebook to deal with the lawsuit is to buy up patents from an existing, older technology giant, such as it has done with IBM, purchasing 750 patents. However, if it is to win, or convince Yahoo to settle, it is going to need to make a considerable number of purchases if it is to make a dent in Yahoo’s vast intellectual property bank, totalling nearly 20,000 issued patents (Google, 2012). In light of this, and in light of Facebook’s IPO vulnerability, spending $1 billion on a start-up company with no turnover, no patents and only 13 staff, could be seen as a terrible move.

In conclusion, there are many theories as to why Facebook felt it was necessary to make this acquisition, yet clear reasoning behind it cannot seem to be found. We can be certain that Mark Zuckerberg’s decision will have an impact on Facebook’s future as a market leader in social networking. In the sense of pure business, Zuckerberg clearly saw an opportunity to capture a company whose growth emulated that of Facebook. Whether this was to safeguard the company from the potential scepticism prior to the impending public offering, remains to be seen. The suggestion that Instagram was purchased for the intellectual property they hold doesn’t seem to have much merit, as we now know that Instagram does not possess any patents. However, Instagram’s single point mobile user interface, which in comparison to Facebook’s multi-point web based format, would allow Facebook users faster and better access to the network if they were to apply the Instagram framework. Doing so would reduce the complexity of Facebook’s technology, affording the largest demographic of their users more comfort in their use of Facebook and its technologies.

 

 

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Author: Dan

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