When Facebook announced that it planned to pay $1 billion for Instagram, the question that flew all over the Internet in reply had only three letters: Why?
Instagram is two years old. It has no revenue. A couple of days ago its investors valued it at only half of what Facebook is paying. How does this deal make any sense? And more importantly what comes next for Facebook's biggest competitors?
Here’s a sneak preview. If you want an equation to demonstrate the balance of power in consumer social networks, it just might look like this:
[Facebook + Instagram] = [Google + Twitter + Pinterest]
First a little history. Not long ago, Facebook considered Twitter to be an existential threat—so much so that it eagerly tried to buy the company, without success. So, Facebook changed its interface—and it made its user experience more like Twitter’s, with a steady stream of status updates. The result? Facebook’s traffic increased, which helped to sell more ads.
Fast forward to today. We don’t know for certain, but it’s very plausible that Facebook was afraid Instagram might fall into the hands of a competitor. With the acquisition, Facebook has strengthened its position in photo sharing (one of the most popular uses of Facebook), and also gained a network of mobile users.
Well, the “new Facebook” (i.e., Facebook + Instagram), looks an awful lot like a hypothetical mash-up between three other companies: Twitter, Pinterest, and Google. Combine Twitter and Pinterest, and you’d get a user experience much like the new Facebook: Connect with friends, share plenty of photos, and exhibit creativity. Close your eyes and imagine a screenshot of a combined Twitter and Pinterest. It could look much like that of Facebook-Instagram.
Now there’s only one, very important, missing element from that hypothetical Twitter-Pinterest combination: ad revenue. That’s where Google enters the picture. Imagine a partnership, or maybe even an outright purchase by Google. The combined entity would offer many of the same, and in some cases arguably better, features than Facebook.
Would such a deal make sense for Google? It could help jumpstart their lagging social networking efforts (Google+ anyone?), develop more information about users to better target advertising, and provide more ad inventory. Look at it that way, and suddenly the combination sounds compelling for all three companies—Twitter, Pinterest, and Google. And with Google [GOOG] trading at $630 per share, there’s plenty of currency to make a deal happen.
And as for Facebook, such a rivalry could indeed become a true existential threat—a far bigger deal than Twitter alone ever was.