By now, it’s probably been brought to your attention that Facebook bought Instagram for a billion dollars on Monday, valuing the two-year-old photo-sharing service at approximately $100 million per employee. Predictably, everyone is asking why.

More than one reputable journalist has covered this story by referencing Facebook’s continued inability to create a compelling, intuitive mobile app, which strikes me as absurd. Facebook isn’t buying Instagram’s ability to create a great mobile app.

Do you honestly believe that Facebook couldn’t create a solid mobile UX for less than a billion dollars?

While Instagram was quietly courting a generation of teenage smartphone users, you were busy reading front-page headlines about how Facebook just could not stop getting grandmothers to sign up. If you were over the age of 55, you were totally psyched on Facebook in 2011! You couldn’t get enough of the stuff!

Facebook knows they can’t build a mobile UX that looks and feels different from their web interface. Your grandmother would freak out. And they can’t significantly change their web interface. Because your grandmother would freak out.

And Facebook certainly isn’t buying Instagram’s 30 million users; they’re all on Facebook already.

So Why Is Instagram Worth a Billion Dollars?

Facebook is paying a billion dollars for the way that Instagram’s users think. It is buying the way that Instagram has trained the market. It’s buying an up-and-coming generation that thinks about their status as a photo.

Sasha Pasulka

Facebook’s users were trained on technology from a generation ago: the computer. They were trained to update their status by typing words that corresponded loosely to their current goings-on. Five years ago, this was, hands-down, the fastest and most frictionless way to communicate with one’s social circle.

Sharing photos was more complicated, involving physically connecting two pieces of hardware, manually transferring files from one device to another, and then uploading those photos to a piece of software. As a result, users uploaded photos irregularly and in bulk; they created albums.

Still, Facebook’s cloud hosting of photos, photo tagging and photo sharing were ridiculously revolutionary when they first launched. It’s a key reason the company was able to win the lion’s share of the U.S. market in such short order. Certainly, Facebook remembers how important photos are.

Not that they need a lot of reminding. If you can think of fresh angle from which to approach a Pinterest story, authorities have requested you contact your local tech editor immediately. Media coverage of Pinterest has become something of a national export; it’s practically your civic duty.

At this point, it doesn’t take a Mark Zuckerberg to figure out that sharing information via images is the next big thing.

A Picture Is Worth a Billion Dollars

There’s a whole lot of super important stuff that can’t be communicated via an image, but, really, most of what you’d want to tell your friends about on a day-to-day basis is, at the least, more engaging when supplemented visually. You just started a new job. You got the acceptance letter to your dream college. You’re in line to see The Hunger Games. Your kid cried at the zoo. Your dog is wearing a wife-beater. Whatever. It’s better with a photo.

But Facebook hasn’t trained you to post a photo whenever you have a thought. Facebook has trained you to type in a status update whenever you have a thought, and upload photos as albums later. They know that social status-sharing via images is the future, they just can’t seem to train the bulk of their users to think like that. And it’s not for lack of trying.

Instagram’s users have been trained differently. Not only were they trained on a completely different technology – one where sharing a photo takes essentially the same amount of time as sharing text – but Instagram’s simple photo filters taught them that every photo they take, even on a smartphone, can be breathtaking.

Instagram convinced users that every image from their life – their stupid cat, the boring tree in their backyard, their hopelessly awkward teenage face – could be as visually stunning in reality as in their mind. It’s a positive feedback loop that would arguably work even as a single-player experience.

As a result, Instagram’s 30 million users started thinking about status updates as photos, not text. When they think of something really important that they want to tell their friends, they think about communicating that information as an image.

That’s what Facebook’s paying for. They can’t figure out how to use a billion dollars to train their own users to think that way, so they’re betting that the 30 million folks on Instagram will prove a more effective behavior-modification tool than EdgeRank.

Will it pay off? That’s a question well above my pay grade. My hunch is that, even at a billion dollars, it’s still less expensive for Facebook than the risk of it being acquired by Google. When Zuck caught even the slightest whiff that Instagram was ready to sell, he probably asked them to name their price.

If you got to the end of this article, congratulations and thank you. I couldn’t figure out how to do it as a picture, and I remain an ardent supporter of the value of the written word. Now, if you’ll excuse me, my dog is humping a chair and I think it would look really good in Kelvin.

Sasha Pasulka is the VP of Marketing at Salad Labs and a digital strategist at Red Magnet Media. You can follow her on Twitter @sashrocks. More from Sasha Pasulka on GeekWire: Hey, startups, users aren’t free…. Why Facebook may surrender users to niche social networks. Editor’s note: Salad Labs is a sponsor of the Seattle 2.0 Startup Awards, presented by GeekWire.

Previously on GeekWireA tale of two acquisitions: A few thoughts on the $1 billion bets by Microsoft and Facebook

Comments

  • http://www.davidpaulsson.se/ David Paulsson

    Probably the most spot on review of this purchase I’ve read (so far). Great article!

  • Mike_Acker

    fascinating report. if you have ever followed a ‘365’, e.g. on flickr you might get the sense of this .   the next step of course is voice to text. when that works well they will have conquered a big bear: voice commo has never been very satisfactory and at the same time people hate to typewrite. now if i can snap a px with my cell and yell “here’s the guy who cut me off on my way to work” and then tweet that all over the country who knows what we can accomplish . only one thing seems likely: more sales of cell phone and band width

  • Mike_Acker

    i love sites that use DISQUS and wish it were more of a standard

  • http://www.intrinsicstrategy.com/ FrankCatalano

    Great analysis. Hadn’t thought of the entrenched UI obstacle (and it frightens me, on some level, to think that a UI as “new” as Facebook’s is already entrenched, but it is – just look at all the copycats, even in vertical markets like education). I continue to suspect it’s more than just UI and user training – I still think that Instagram’s user data is a part of the value – but this is an thought-provoking take on a driving force for the deal.

    • http://twitter.com/chrisamccoy Chris McCoy

      I agree, Frank

  • Jan

    agree, this is the most thoughtful analysis yet.

  • Forrest

    “That’s what Facebook’s paying for. They can’t figure out how to use a billion dollars to train their own users to think that way, so they’re betting that the 30 million folks on Instagram will prove a more effective behavior-modification tool than EdgeRank.”

    So you’re assuming that the 30 million people using Instagram don’t use Facebook? Seems like a big assumption. Would love to see some data, but my bet would be that the vast majority of those 30 mil already use Facebook.

    • Theo Clark

      From the article: “And Facebook certainly isn’t buying Instagram’s 30 million users; they’re all on Facebook already.”

  • Bink Binkerson

    They didn’t buy anything, they are creatures of hype; they bought the hype.   There are several better photo apps out there, Tadaa being the top dog.    This is echo-chamber capitalism.

    • http://twitter.com/fijiaaron Aaron Evans

       Bingo, it makes the VC balance sheets look good, until housing values drop — I mean PPC advertizing, I mean ??

  • Guest27

    Maybe?  Maybe not.

    Instagram Users, to date, are a peculiar demographic…most likely early-adopter gen-1 iPhone users (who’ve stood in line and upgraded year after year), they are the penultimate digital consumer.

    They aren’t average or normal.

    They also spend the most minutes/day typing, either via text messages or Wall updates.  They are ambidextrous visually and with the written word.  Simply, they produce and consume digital Everything.

    So, why $1B?   I’d posit 2 reasons:

    1.  Those 30M Users were spending too much time away from Facebook.  And, as the #1 digital consumer group, Facebook wanted those minutes back under their roof (or, their garage).  Facebook won’t be expanding in subscriber base numbers, their only way to expand is to gain more “average time on site” per day (whatever site/app that is).  Time on site = ad exposures.  The math is simple.

    2.  Metadata.  Open up your Properties for every Instagram photo you’ve taken and look at the information that’s stored out of sight.  Facebook wants that data. 

    A minor third reason is that Instagram has proven to be addictive.  Anything addictive is attractive to Facebook.  They need nicotine to drive their engine forward.

    Call me paranoid, but, the news of this acquisition by Facebook made me instantly think of “Facecrime.”  As in:

    “It was terribly dangerous to let your thoughts wander when you were in any public place or within range of a telescreen. The smallest thing could give you away. A nervous tic, an unconscious look of anxiety, a habit of muttering to yourself–anything that carried with it the suggestion of abnormality, of having something to hide. In any case, to wear an improper expression on your face…; was itself a punishable offense. There was even a word for it in Newspeak: facecrime…”- George Orwell, 1984, Book 1, Chapter 5 

    • Guest

      Much more plausible, at least in my opinion.

    • Forrest

      Yep, much more plausible than thinking the 30 million users don’t use facebook and can train 845 million other users…

    • Bill

      You’re dead on with this answer

    • Quest2000

      Interesting Reply.
       But Did any of you read where she noted that those 30m people would undoubtedly  be engaged in facebook.
      I think sometimes there multifaceted reasons for these kinds of business decisions and so therefore SaSha’s analysis holds as much water as yours.

  • BrentR

     gotta join the chorus: great post. analysis is spot on, and it’s kicky but not “PandoDaily-I’m-really-just-a-kid-playing-reporter” kicky.

  • http://twitter.com/azzcatdesign Catherine Azzarello

    Great analysis! Makes total sense.

  • Skip It Again

    Training and technology aside, didn’t they also buy 30 million users? I would be interested to know how many are already facebook clients. A bunch I would suspect. If that is the case many Facebook users were already trained.

  • Forrest

    So all those who think it’s a great analysis, why is it you think those 30 million users aren’t already using Facebook? I’m honestly curious.

    • http://www.intrinsicstrategy.com/ FrankCatalano

      I wouldn’t conclude that after reading the post. Sixth paragraph: “And Facebook certainly isn’t buying Instagram’s 30 million users; they’re all on Facebook already.”

      • Forrest

        Ah, didn’t see that before. Does that not contradict: “That’s what Facebook’s paying for. They can’t figure out how to use a billion dollars to train their own users to think that way, so they’re betting that the 30 million folks on Instagram will prove a more effective behavior-modification tool than EdgeRank.” ?

  • thinkloop

    Interesting analysis!

  • brittstrom

    Big idea, incredibly well written. Kudos, Ms. Pasulka, I read to the very last Kelvin. 

  • http://twitter.com/chrisamccoy Chris McCoy

    Sharp analysis. Well done.

  • semfios

    great article! cheers

  • http://antoinerjwright.com Antoine RJ Wright

    5 years ago, how were you sharing photos – mobile upload to FLickr
    Today, how are you shareing photos – mobile upload to Instagram

    I fail to see the difference, but then again, I also owned a smartphone 5 years ago. Perhaps on a geek site, this article is better meant for those folks whose “geek cred” started with the iPhone.

  • Billg

    Ah but with google glasses, you can send that photo of the thing you are looking at to… well even if you post it to Facebook, google got to look at it first as you sent it.

  • ellegold

    this is a great analysis, thank you Sasha

  • http://twitter.com/jclaussftw Jason Gerard Clauss

    I disagree with the point that Facebook is afraid to change their UI. In fact they’re all too willing to change it in ways that suit THEM rather than US. Their previous image viewing UI was near perfection (you won’t hear me say that often about Facebook) while their current one is a huge step back. Facebook’s usability MO is more about forcing us to adopt patterns that are beneficial to them rather than creating patterns that we actually want. Their monopoly status is the only thing that allows them to do this.

    And no, having an eff-ton of money has nothing to do with ability to deliver a good UX. Look at Adobe’s CrapSuite. Look at pre-Metro Microsoft products. Look at Microsoft Flight and every other badly designed high-budget game.

    Written statuses aren’t going anywhere. They can communicate a much wider range of things and certainly communicate things people would rather NOT put into the visual record. Someone is much more likely to type “I look like shit today” rather than actually posting a pic of themselves looking like shit that will probably haunt them someday. It presents a degree of plausible deniability in addition to its greater ease of use.

    Facebook is going to bungle Instagram. This I guarantee you. They will Facebook-ify the UX. They’ve already alienated much of Instagram’s core userbase – that hive of intolerable hipsters who think they are creative photographers because of a filter – by sheer fact of the acquisition. Facebook could have just as easily created a separate, lightweight app that apes Instagram, that would allow them to keep the same familiar app that won’t scare off old tech-phobic grannies while enabling those who want the quick and easy visual status mode.

    This will go down as a strategic blunder. Mark my words.

  • DAW1972

    Well done. While many other bloggers are having a hissy fit, deleting Instagram and going back to reviewing the top 10 blogging apps on iOS (how mainstream), you have written a well thought out big picture piece. Probably the best piece I have read on this. You really get it. 

  • http://www.blockbeta.com Robbin Block

    Yes, a make/buy decision (easier to buy than build, acquire photo-sensitive users than to retrain existing ones) and a preemptive strike. Maybe $1 billion makes sense when money is no object. It’s just play money for these guys at this point. I just hope that at least some of it goes to a good cause.

  • Sthlmo

    “Do you honestly believe that Facebook couldn’t create a solid mobile UX for less than a billion dollars?”
    — Microsoft has still not created a solid dekstop UX for many billions of dollars and 3 decades of work. :)

  • cfo

    In a strange twist, a by-product of this acquisition may be the further sounding of Blackberry’s death knell.

  • http://www.franciscogalarraga.com Francisco Galárraga

    I honestly believe that the only reason that FB bought instagram for 1 billion is that instagram is one of the apps that has great brand value. And I personally think Zuck got ripped off. But “FB buys IG for 1 billion” makes for some great headlines.

  • Marty Cornish

    Awesome article! I’m excited for the day where people can just check into your live video feed running 24-7. At least while you’re logged into facebook…so…24-7.

  • http://www.facebook.com/profile.php?id=54401320 Achhunna Mali

    Excellent article. Best explanation about FB acquisition of Instagram I’ve read thus far. Great job Sasha.

  • Test

    If this analysis is right, we’ll see about a billion dollars allocated to “customer list” in their purchase price allocation disclosure in the upcoming S-1 revision / future 10-K disclosures.  Completely absurd IMO. But we’ll see.

    a) solid technology that scales, and so nifty it picked up _significant_ traction from the onset.

    b) social networks are mostly about photos

    c) 100% overlap of “client” list – instagram photos are already posted to twitter, g+ or fb.

    and c) is likely why we will see zero value ascribed to user base.

    In any event, easy choice for acquisition.

    introduce bidding war = $1b valuation.

    not more complicated than this. Google F’d up.

  • http://twitter.com/PaulEnRoute ¤| Paul |¤

    I think your analysis might just be right….thanks.

  • sgm182

    This was just awesome. Great article to start off my morning.

  • http://twitter.com/toddhooper Todd Hooper

    Great article Sasha. Hadn’t thought of this angle…

  • http://www.facebook.com/people/Kathrine-Mya/100003635639109 Kathrine Mya

    pretty cool stuff mate 

  • Rufusd

    Another article that explains nothing. Instead of talking to instagram, Zuck should have spent that weekend by the pool in Palo Alto with a couple of buddies cloning instagram. Paying a billion for your own users is insane.

  • http://profiles.google.com/stinkoid S. Morris Rose

    Setting aside any question of the thesis that the purchase was to change the mindset of Facebook users, how precisely would the purchase do that? Grandma is still typing her status update and she isn’t one of the thirty million IG users. What happens next that changes that?

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