The news that Facebook has bought Instagram makes perfect sense. Mobile is the future, and Facebook’s own app efforts have been the subject of much criticism. And more problematic, it remains a vulnerability going forward because of the lack of mobile revenue.
Instagram won’t provide any revenue, not any time soon. Maybe not ever. But it does provide a great mobile experience the meshes well with Facebook. You don’t share Instagram photos on an Instagram Web site, after all, you share them on the app, on Facebook and on Twitter.
But paying $1 billion? Well, that’s crazy money. Even if Instagram was raising money at a $500 million valuation last week, saying Instagram, after 18 months, is worth 1 percent of Facebook’s reported $100 billion valuation is simply insane. And this comes just a couple weeks after Zynga paid $180 million for OMGPOP just six weeks after that company released the white hot app Draw Something.
To put that $1 billion in perspective, Google paid $1.65 billion for YouTube in 2006. Yahoo reportedly paid $35 million for Flickr in 2005.
Clearly, the $1 billion was either a pre-emptive move, an offer Instagram couldn’t refuse, or there were multiple bidders in the game, driving up the price. I’ll be curious to see how much Facebook is required to disclose about the history of the transaction when it updates its S-1.
But I also wonder if this will now trigger a larger bidding war for the most popular mobile apps out there?
It would be tough for Apple to get into this game, despite its mind-boggling piles of cash. It would likely raise thorny anti-trust issues.
But it’s easy to imagine Google swooping in to grab some other photo sharing apps, like Hipstamatic, to give it some way to match Facebook on the photo-filtering features.
Finally, while it’s both mobile and Web, you have to wonder just what someone would pay for Pinterest at this point?
In any case, it’s easy to see how we get to an arms race in the world of mobile apps. Companies become paranoid that they’ll miss out, they pay too much to make sure a hot app doesn’t land in the lap of a competitor. This is going to make some young entrepreneurs very wealthy, some quick returns for lucky VCs. Whether it turns out to make an ounce of business sense, well, it’s the kind of question that tends not to get asked until much, much later.