After frenzied two days of negotiations, Facebook Inc. agreed to acquire the popular photo filter and sharing service Instagram for $1 billion in cash and stock, nearly double the amount Instagram had been valued at during its last series of capital investment financing only the day before.
The rush to complete the deal, along with the exorbitant price paid, highlights just how important building an improved mobile experience is to Facebook and its future.
Since its inception only two short years ago by San Francisco based co-founders Kevin Systrom and Mike Krieger, Instagram has exploded in popularity to nearly 30 million registered users globally.
The service, which allows users to apply digital visual filters for improved picture aesthetics—akin to the retro styles of the discontinued Kodak Instamatic or Polaroid cameras of the past—makes photo sharing a quick and simple process on Apple and Android smartphone operating system platforms.
Perhaps the biggest appeal of Instagram to Facebook, however, was not solely in the service that it provides, but rather in its core user demographic.
Online consumer metric analysis service Experian Hitwise estimates that greater than 50 percent of Instagram users are between the ages of 18 and 34, with teen users accounting for a significant proportion of the rest. In contrast, the majority of Facebook users are over 25 and, compared to their younger counterparts, do not rely as heavily on mobile devices and applications.
Simply put, the younger and more engaged mobile audience is one that Facebook covets as a means to generate more revenue through its advertising-based business model.
With its forthcoming initial public offering likely next month, and facing growing competition from the likes of Google, Twitter, and a wide array of mobile social apps, Facebook is under palpable pressure to increase its relevance in mobile applications.
While the Instagram acquisition might not be the sole panacea to Facebook’s problem, it could potentially spur the company to begin to think differently about its strategy and learn from Instagram’s mobile execution.
Facebook CEO Mark Zuckerberg and Instagram CEO Kevin Systrom both stated in separate statements that Instagram would continue to function independently following the close of the transaction, which is expected at the end of this quarter.