Buying Instagram is probably the smartest thing Facebook has ever done.
Facebook Inc. (FB), the world’s largest social networking website, was founded by CEO Mark Zuckerberg and several Harvard College roommates in 2004. The company’s name initially was FaceMash, which was changed to TheFacebook, eventually dropping “The” from its name to become, simply, Facebook. Zuckerberg and his co-founders initially launched the service for their Harvard classmates, quickly expanding it to other universities and then to the general public. The company since then has grown into a global giant with 2.5 billion users and a market cap of $479.2 billion. The company reported FY 2019 net income of $18.5 billion on $70.1 billion in revenue, nearly all of which came from advertising.
Facebook has expanded far beyond its original social networking platform since its founding 16 years ago. Its products also include messenger services, photo and video sharing, augmented reality, and many other apps and services. Acquisitions have been key to growing these businesses and Facebook’s revenue in general. Facebook’s strategy has been to buy potential rivals before they can get too big. In the process, the company sometimes has paid exceptionally high prices for some deals. The company has also drawn attention from the Federal Trade Commission (FTC) due to potential anticompetitive practices, with the FTC recently demanding data on unreported purchases from Facebook as well as other big tech companies.
Instagram is a photo and video-sharing social networking platform that was launched in 2010. Through the Instagram app, users can upload, edit, and tag photos and videos. The company remained independent up until it was acquired by Facebook for $1.0 billion in 2012. While Facebook bought Instagram as the photo-sharing company was garnering significant attention from venture capital firms and other investors. Some estimates indicate that Instagram generates more advertising revenue than its parent company.
When it acquired Instagram, Facebook opted to build and grow the Instagram app independently from Facebook’s main platform; Instagram remains a separate platform to this day. The price that Facebook paid for Instagram, which at that time was generating no revenue, reflects Facebook’s willingness to pay a premium for young companies.
In 2012, Facebook bought the 13-person photo-sharing app Instagram. Six years later, it seems safe to say it was the company’s smartest purchase ever, with the app now estimated to be worth $100 billion.
It’s a staggering 100-fold return on the original $1 billion purchase, especially considering its next high-profile social media acquisition, WhatsApp, cost Facebook $19 billion in 2014. (The VR company Oculus also cost Facebook twice as much as Instagram.)
The new price tag comes from a Bloomberg Intelligence report shared with Quartz. Its author, analyst Jitendra Waral, also estimates that Instagram should reach 2 billion users—catching up to Facebook itself—in the next five years. Instagram recently announced it reached 1 billion monthly users.
Instagram, Waral writes, “should be able to double the traffic at a faster pace, as the adoption curve of the platform has outpaced core Facebook.”
The financial implications of the acquisition have been huge for Facebook, which has been able to easily replicate the News Feed ad model for the photo app. Its newest product, a broadcasting platform called Instagram TV, could boost the business as well, Waral adds.
Users are spending nearly as much time on Instagram as they are on Facebook. According to a recent report, that’s about 53 minutes per day for Android users. Market analysis firm eMarketer also recently estimated that Instagram now accounts for nearly 30% of Facebook’s net mobile ad revenue, with that share potentially growing to 40% by 2020.