Why Facebook bought Instagram

Why did Facebook pay a  billion dollars for Instagram? The answer is simple: Facebook wants to own photo-sharing.

Here you have an early-stage photo-sharing player that is on a rapidly climbing trajectory, but can still be had cheaply. The question is not why Facebook bought it, but rather, why WOULDN’T Facebook buy it? Fear and greed often go hand in hand, but in this case the simpler answer is that it consolidates Facebook’s position in this arena.

Is it indicative of a bubble?

The Instagram purchase is more a factor of its stratospheric growth at a time when Facebook is prpeparing for a listing, than of a bubble as such. It is a case of Facebook defending its position as the world’s leading photo-sharing environment, and of making an obvious acquisition of the fastest growing player in this arena, rather than of Instagram in its own right suddenly having this high value. Time is tight for Facebook, prior to its IPO, and they obviously made an offer that couldn’t be refused, taking advantage of the current high value of Facebook shares.

Well then, is Groupon a bubble?

Groupon’s biggest mistake may well have been not accepting a similar offer-that-couldn’t-be-refused from Google and believing its own hype about how much it was worth. Although it has a market cap of above $8bn, versus that $6bn offer, it is unlikely they will be able to extract that value from the business. The market has already punished Groupon, and its share price is down to a low of near $13  from a high of $31 (Nasdaq data, 11 April 2012). That looks like fairly sane market response to a business that had previously been over-hyped. If we were in the midst of a bubble for group buying sites, that share price would be closer to its highs.

Of course, both the acquisition of Instagram by Facebook and Posterous by Twitter, not to mention Zynga buying the creators of Draw Something, will spark renewed fervour to come up with the next big app or platform that can be sold to one of the big guys. Every developer is looking for a big payday, and this just fuels the dreams, although in most cases not the reality.