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With Facebook’s IPO pending, the social media mammoth has been bolstering user offerings and analytics capabilities with major acquisitions, most recently with the social photo sharing app, Instagram.

With news this past week that Facebook’s growth – it now boasts 900 million users worldwide – has begun to slow, the social network likely will continue to explore new ways to more efficiently monetize the existing user base.

Nearly one-seventh of the world’s population is now registered on Facebook, and a significant percentage of those users reside in developed countries that have a robust online advertising market.  By focusing on users in these markets, Facebook will need to create higher engagement across multiple channels (mobile and desktop), increase ad inventory via more page views, and garner higher CPM rates via ad optimization and rich media ads.

The Instagram transaction offers new insight into the strategic approach Facebook is taking to drive growth and monetization. When the company goes public, and “opens its kimono,” so to speak, it will no longer have the privilege of maintaining internal metrics without the threat of backlash.

With public disclosure requirements looming, Facebook will need to continue making strategic acquisitions, driving momentum in order to keep shareholders happy.  We expect to see the bulk of these acquisition dollars directed towards experience-enhancing and analytics technologies.

Kushal Saha

Despite the speculation, the $1 billion acquisition of Instagram was not solely for the purpose of acquiring its 30 million users, as the majority of them are already on Facebook.

Instead, it was a logical move to enhance photo sharing creativity, simplicity, and overall user experience. Since the company’s inception, it has revolutionized photo uploading, downloading, and sharing, with its easy-to-use offering and is now more popular than ever.

Facebook’s chief executive, Mark Zuckerberg, the driving force behind the acquisition of Instagram, recognized the increasing importance of images in social sharing, coupled with the fact that most pictures will be taken and shared via mobile devices.

Through this acquisition, he also acknowledged that the more time people spent on Instagram, the less time they spent on Facebook. For Facebook, time spent on the site means more advertising dollars, which in turn means higher revenue and is critical to the continued growth and success of the social network.

Instagram is not only a way for Facebook to redirect users’ attention back to its network, it is also a serious foray into the mobile space.  With the proliferation of smartphones and tablets, users are spending exponentially more time on their devices, using them to do everything from accessing music and videos to taking and sharing photographs.

A recent study by Pew research found that nearly half of all Americans own a smartphone. Mobile, it is safe to say, has redefined digital consumption across the Internet. In order to stay ahead of this changing consumer landscape, Facebook will continue both to develop and acquire offerings to reach the customer on every channel whether it is mobile, tablet or desktop.

In addition to Instagram, in recent months Facebook has also made other strategic acquisitions that bely its core growth and development strategy.  Much was made of Facebook’s acquisition of Gowalla in December 2011, in large part because, after buying the FourSquare competitor, Facebook killed the social service almost immediately.

While many believed the Gowalla acquisition was Facebook’s latest push into the social/local market, it turned out that Facebook’s goal in acquiring the technology was to strip it down and use the pure local analytics portion of the offering, enhancing its ability to target local advertising markets.

Rather than improving the user experience with a local tool, the company used Gowalla to improve ROI for its advertisers, and to entice local and regional players that might not otherwise have viewed Facebook ads as a viable channel.

While many mourned the demise of Gowalla, Facebook’s post acquisition action is indicative of the two-pronged growth strategy that the company will use after it goes public – actively seeking to enhance user experience and features, while simultaneously improving the click-through rates for its advertisers with more targeted placements.

The strategic nature of the Instagram acquisition also allows us to draw some conclusions about the purchase price for Instagram and what it indicates for the social media space at large.

As mobile access and location-based services evolve, the major players must make strategic acquisitions in order to stay relevant, and the strongest technologies will receive high valuations from those companies who are playing to win. Facebook is planning for the future, moving full steam ahead to stay ahead of the evolving tastes of its user base.

Therefore, we expect to see Facebook make more acquisitions, targeting companies that enhance its user experience and helping it to maintain and grow its market share.  Acquisitions focused on enhancing user experience with mobile and location-based offerings will likely be among its top priorities, along with analytics that drive advertising dollars, and  solutions that specialize in processing billions of user data points.

Such technologies include predictive data analytics and ad optimization, which will effectively optimize its CPM, page views, conversion rates, and dwell-time to enhance the overall experience of both users and advertisers.

Kushal Saha is a Managing Director in the Information Technology practice at Cascadia Capital with a focus on the Internet and new media companies. Prior to joining Cascadia Capital, Kushal was part of the leadership of the Internet & Digital Media/Technology Investment Banking Group for Merrill Lynch & Co.

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