Facebook Acquires Instagram in $1 Billion Deal

Facebook Instagram logo Split - H 2012

Facebook Instagram logo Split - H 2012

Mark Zuckerberg calls the purchase of the photo-sharing site a "milestone" for his company.

Facebook has made its first significant purchase, acquiring the hot mobile photo-sharing app Instagram for $1 billion.

Mark Zuckerberg announced the deal Monday on Facebook, calling it an "important milestone" in the company's history.

San Francisco-based Instagram has experienced tremendous growth since launching in 2010. The company most recently reported about 30 million users, about double from the beginning of the year. A recent launch onto the Android platform had the potential of doubling the number of users again.

Launched in 2010 by Kevin Systrom and Mike Krieger, Instagram instantly became a hit in the social media universe by allowing users a way of more conveniently sharing recently taken photos from their mobile phones.

The company got $500,000 in initial seed funding in 2010 and raised $7 million in venture funding in early 2011. Baseline Ventures and Benchmark Capital were two of the primary investors, along with tech heavyweights like Twitter's Jack Dorsey. Instagram reportedly was on the verge of acquiring $50 million worth of Series B funding last week, which would have valued the company at $500 million.

Now, Facebook has stepped up with a whopping deal worth $1 billion in cash and Facebook shares. The move will enable Facebook to leverage the popularity of a burgeoning service as well as stave off a potential competitive threat as observers have noted that Instagram was beginning to develop into a social media network in its own right.

In the announcement, Zuckerberg cited Instagram's "strengths and features." He added that Facebook wouldn't merely attempt to integrate the Instagram platform into Facebook but rather make a commitment toward "building and growing Instagram independently."

"We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience," Zuckerberg said. "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."

Instagram is the first big purchase by the social media giant, which is expected to go through with its IPO as soon as next month. The IPO will raise about $5 billion for Facebook, though Zuckerberg cautions not to expect many more splashy acquisitions.

"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," he said. "We don’t plan on doing many more of these, if any at all. But providing the best photo-sharing experience is one reason why so many people love Facebook, and we knew it would be worth bringing these two companies together."

The transaction is expected to close this quarter.

Brian Wieser, a senior research analyst at the Pivotal Research Group, notes that Instagram likely only has de minimus revenue currently, but calls the acquisition defensible.

"The valuation is unquestionably high for the business on its own merits," he says. "However, given the importance of photo sharing to Facebook – recall the site’s foundation as one designed to essentially share photos – there is defensive value to preventing a competitor such as Google from acquiring the property if only for the possibility that Instagram continued growing at its recent pace and facilitated the growth of another social network. This highlights an ongoing theme among providers of online advertising, namely the highly capital intensive nature of the business given the otherwise open nature of the web."