What A Billion Bucks Gets You

April 11, 2012, 10:25 am Kochie's Business Builders Yahoo!7

What exactly is Facebook getting for its billion dollar purchase of Instagram?

What A Billion Bucks Gets You

Social media colossus Facebook announced yesterday a billion dollar deal to buy the start-up behind smartphone photo sharing app Instagram, a mobile phone application that has never made a cent.

To put that in perspective, Channel Ten is worth $800 million after cutting a profit of $64 million last year. Instagram doesn’t make any money. Think about it.

Whatever the comparison, Facebook’s valuation of the San Francisco start-up is astronomical.

To fill you in, Instagram is a hugely popular photo editing app released in late 2010. It’s been downloaded over 30 million times and lets people give classic looks to normal photos by using a range of filters. The swish looking photos can then be shared on social networks.

In a sort of combination of the Twitter and Facebook platforms, Instagram users have friends and followers, and can comment on and ‘like’ other peoples photos.

Regardless of what you make of the app, the price paid by Facebook is nothing short of astonishing and reflects the value of building a big customer list and the importance of first mover advantage.

The 30 million Instagram users out there might not be paying anything to use the app, but access to that client list is worth a lot to advertisers or anyone able to integrate them into an existing business.

Buying customer lists can be a very efficient, cost effective way to gain customers and has been commonplace for a long time. The trick is sourcing the lists, gauging how much to pay and deciding what to buy.

While Facebook is also getting a great little app for its billion bucks, the fact is there’s no revenue being generated and as such no real value. Whether this is monetised down the track is another thing, but on the face of it they’re buying a billion dollar client list.

If you have ever doubted the value of maintaining a tidy client registry, this should put those doubts to bed.

Instagram’s price tag also illuminates the value of first mover advantage and establishing a market leading product, even if it is free. In the first 12 hours the app was available on Android devices, one million new users downloaded it. If Facebook were to put out an imitation app there’s no way it would be so popular.

Sure, there were other photo based apps on the market when Instagram rolled in, but none with the editing options and easy social network integration of Instagram. They moved early in the space and quickly established the best mobile photo app on the market. It’s a long road for any challengers wanting to get on level footing now. Unless they pay for it.

The purchase undoubtedly has a lot to do with heading off a threat before it becomes a bigger problem. “The Instagram buy could be worth tens of billions of dollars if it holds off Pinterest and Facebook remains on top,” Silicon Valley analyst Rob Enderle says.

However looking behind the motive at what Facebook is really getting for their billion bucks shows the two big value drivers of Instagram are those inherent to most really successful businesses – a strong database of customers and being first movers with a market leading product.