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Facebook Takeover of Instagram: The Right Decision?

As is well known, Instagram has been bought by Facebook. But the following are specifics that you most likely don’t know or haven’t thought about.

  1. This deal was worked out over a long weekend (roughly 3 days) between CEO Zuckerberg (Facebook) and Kevin Systrom
  2. The CEO’s  are both under 30 and this deal is one of the largest in recent history
  3. Facebook is set to go public and is estimated to be worth around 100 billion, so roughly 1 percent of net worth has been spent on this takeover
  4. Systrom’s initial offering price was around $2 billion according to sources
  5. Analysts valued Instagram around $500 million
  6. Instagram currently has around 40 million users
  7. This type of deal would only be possible in non-publicly held companies and could be viewed as Zuckerberg’s last impulse purchase decision, before the IPO

Let’s take a look at the above and see about more of an in-depth review of these issues.

First, the power of these two young players is incredible being that they are both in charge of privately held companies. With the technology boom there appears to be a shift in authority to the younger and more tech savvy generation. This type of purchase is considered risky and unorthodox by many investors and by the book analysts. It almost seems that Zuckerberg is acting through paranoia and desire to eliminate any potential competitor, when ultimately, Facebook may have simply been able to out compete Instagram. Think about this, one billion was paid for a company that to this date did not have any revenue and only 13 employees. That is 76.9 Million for each employee if you do the math evenly, sounds a little high for what it is, don’t you think?

Secondly, there are plenty of other photo upload apps that are on the market. Is Facebook’s strategy to try to buy up and eliminate all competitors? This will only encourage more new companies to form to compete for this market and a share of Facebooks deep pockets. Where is the competitive advantage development of one of the world’s most successful companies, where are Facebooks strengths and abilities to outsmart, out develop and out compete? I would like to take a moment to reference one of the greatest strategic thinkers of our time, Michael Porter “Eliminating Rivals is a risky strategy. A profit windfall from removing today’s competitors often attracts new competitors and backlash from customers and suppliers” I believe this accurately portrays that this will entice others to join the photo uploading, social media competition market.

Lastly, the motives behind the deal need to be investigated, such as:  was instagram really a threat? Business Insider argued that Instagram was Facebook’s biggest threat and that Facebook could eventually lose out to Instagram because of Instagram’s ease of use through the mobile devices. As more and more users access the internet and social media websites through their phones, they want to be able to upload and view photos easily. One way that the article outlines the ease of use of Instagram is the sheer number of screens that are used vs. Facebooks number, Instagram users need to only access one screen, where Facebook users need to use six and the load time is slower. This article is missing a major factor in a consumer’s decision to abandon and move to a new social media/photo sharing website. They are completely ignoring switching costs. The specific cost of switching from Facebook to Instagram is the rebuilding of your friend lists as not all Facebook users have Instagram. We each remember the annoyance of creating a Linked-In profile and connections when we already had a Facebook page and friend database collected, but we did it because the purpose and intent are different. Facebook and Instagrams purpose and intent are the same, and there is no reason that Facebook couldn’t have developed better mobile updates to limit the amount of screens to go through.  Facebook could also add easy photo editing options without having to buy out a competitor that would not have been a long run threat with some small tweaks to the already existing Facebook mobile application.

Ultimately, a quick search of the internet will reveal many articles that completely disagree with my assessment above and state instead, that the acquisition was a bold and intelligent move that will eliminate a very real threat to Facebook. The logic is the same as mentioned above as well as the platform being created for mobile users and not for desktops or laptops. But the common thing that these articles are assuming is that Facebook would not have strategically adapted to out compete these smaller businesses. I think the acquisition was an easy way out of having to creatively solve the problem, but again, thats just my opinion.

Sources: 1, 2, 3