Facebook Paid $1 Billion for a Company With No Revenues. It Was a Brilliant Move.

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April 10 2012 7:00 PM

Hey, Instagram, Here’s $1 Billion for Your Cool Photos

Why did Facebook pay so much for a company with zero revenue?

Mark Zuckerberg.
Facebook CEO Mark Zuckerberg. The social networking site purchased Instagram for $1 billion this week.

Photograph by Justin Sullivan/Getty Images.

When word came that Instagram had been acquired by Facebook for $1 billion, the tweets came fast, and they were furious: “Delete ur instagram!! The Feds own it now!!” “I had a higher opinion of you Instagram.” “Soon as I delete my Facebook they decide to buy instagram #FML.”

Will Oremus Will Oremus

Will Oremus is Slate's senior technology writer. Email him at will.oremus@slate.com or follow him on Twitter.

To an outsider, the outrage was puzzling. A small company that lets you share photos with friends and strangers was purchased by a larger company that lets you share photos with friends and strangers. For Facebook, targeting Instagram makes sense. Its mobile photo-sharing tool is ugly and clunky; Instagram’s is pretty and seamless. With the purchase, Facebook upgraded a weak spot in its business. This kind of deal happens all the time in Silicon Valley—think Yahoo buying Flickr in 2005, or Google buying YouTube a year later.

For many startups, in fact, getting acquired by a company like Google or Facebook is the ultimate marker of success. And Instagram’s loyal users shouldn’t fret too much about the plucky little company selling out. Sure, their pseudo-intimate community of 30 million will expand, and their data might be mined, and Facebook is stupid and for old people. But Facebook chief Mark Zuckerberg has promised to keep Instagram independent, meaning its users won’t have to share their photos on Facebook if they don’t want to. (Then again, Zuckerberg does have a habit of changing his mind.)

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There’s one thing about this deal that doesn’t quite make sense at first blush, though: the price tag. Facebook paid $1 billion for a two-year-old San Francisco startup, a company that has 30 million users but zero revenue. True, Instagram had differentiated itself with a clever gimmick: With one click, you can choose among an array of color filters that turn your drab smartphone snapshot into something resembling a vintage Polaroid. That feature, and the fact that the Instagram app is free, doubled its popularity in just the past five months.

But Instagram’s market position isn’t unshakeable: It had only recently conquered a paid app called Hipstamatic as the leader in fuzzy-looking iPhone pics. It seems inevitable that the cool kids will eventually toss their color filters aside in favor of some new aesthetic gimmick. Surely Facebook, with its 3,000-plus employees worldwide, could have just built something similar to, if not better than, Instagram for a lot less money. So why did it pay $1 billion?

Because for Facebook, this isn’t just about improving its photo-sharing app. It’s about domination. Facebook doesn’t want to be one among a number of options for sharing your personal content with friends and strangers. It wants to be the only option. Just as Google rakes in revenue by ruling search, Facebook’s business model depends on monopolizing sharing on the Web. Not just sharing status updates, or likes, or memes, or even photos—but sharing, as an activity. To secure that kind of ubiquity, Facebook will wield its pocketbook to take startups like Instagram out of play. If it doesn’t, someone else might scoop them up.

When you think in those terms, the price starts to make sense. Instagram may not be worth $1 billion to anyone else—indeed, it was valued at half that price just last week—but it’s worth that and more to Facebook to head off a potential challenge to its core business. Let Google or Twitter or Pinterest buy Instagram, and suddenly they’re great alternatives for sharing photos. And if there’s one thing Mark Zuckerberg wants, it’s to make sure there are no great alternatives to Facebook.