Facebook will pay US$1 billion in cash and stock for Instagram, a two-year-old photograph-sharing application developer, in its largest-ever acquisition just months before the No. 1 social media Web site is expected to go public.
The price was stunning for an apps-maker without any significant revenues, even when measured by the lofty standards of Silicon Valley, where startup valuations have soared in recent years. It highlights the rising stakes in the social networking market in which services such as Facebook need to constantly excite consumers with new features and mobile applications.
By acquiring Instagram — in a deal announced days after the startup closed a funding round that valued it at US$500 million — Facebook might also have sought to absorb a potential rival or at least prevent it from falling into the hands of a major competitor such as Twitter or Google Inc.
“Anytime you see a social platform that’s growing that quickly, that’s got to be cause to be nervous,” said Paul Buchheit, a partner at the startup incubator program Y Combinator and a cofounder of FriendFeed, which Facebook acquired in 2009.
“It would be better to have bought Twitter at this stage,” he said of Facebook. “So if you’re thinking this could be the next Twitter, it could be a smart thing to do.”
The Instagram application, which allows users to add filters and effects to pictures taken on their iPhone and Android devices and to share those photographs with their friends, has gained about 30 million users since it launched in January last year.
Instagram says that as of the end of last year, its users had uploaded about 400 million photographs or about 60 photographs a second, suggesting the sort of activity that Facebook seeks as it tries to wring revenues from mobile devices. Instagram launched its Android app just last week, garnering more than 1 million downloads already.
Instagram, with roughly a dozen employees based in San Francisco, closed a US$50 million funding round last week from investors, including Sequoia Capital and Greylock Partners, according to a source familiar with the matter. The funding valued the company, founded in early 2010, at US$500 million, it said.
Facebook, which is expected to raise US$5 billion via the largest Silicon Valley initial public offering next month, would acquire Instagram’s entire team.
“This is an important milestone for Facebook because it’s the first time we’ve ever acquired a product and company with so many users,” Facebook chief executive Mark Zuckerberg said in a blog post. “We don’t plan on doing many more of these, if any at all.”
The deal, a closely kept secret at the tiny start-up, is expected to close this quarter. CEO Kevin Systrom announced the transaction to Instagram employees at a 9am meeting on Monday, according to the source inside Instagram.
Facebook, the world’s No. 1 social network with more than 845 million users, is facing increasing competition. Last year, search giant Google launched Google+, a rival service that offers many of the features available on Facebook.
With its purchase, Facebook said it would continue to develop Instagram as an independent app that remains compatible with other social networking services.
“We plan on keeping features like the ability to post to other social networks, the ability to not share your Instagrams on Facebook if you want and the ability to have followers and follow people separately from your friends on Facebook,” Zuckerberg wrote.