Facebook pre-empts rivals with $1bn deal

Facebook’s stunning decision to pay $1bn in cash and stock for photo-sharing platform Instagram has raised suggestions it did the deal to absorb a potential rival — or pre-empt a move by a rival such as Twitter.

The deal for the two-year-old company marks a change in strategy for Facebook and is the site’s largest ever acquisition. It comes just months before Facebook floats on the stock exchange.

The price was stunning for an apps-maker without any significant revenue, even when measured by the lofty standards of Silicon Valley, where start-up 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 start-up closed a funding round that valued it at $500m — Facebook may also have sought to absorb a potential rival or at least prevent it from falling into the hands of a major competitor like Twitter or Google.

“Anytime you see a social platform that’s growing that quickly, that’s got to be cause to be nervous,” said Paul Buchheit, a co-founder of FriendFeed, which Facebook acquired in 2009.

“It would be better to have bought Twitter at this stage,” he said. “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 photos with their friends, has gained about 30m users since it launched in Jan 2011.

Instagram says that as of the end of 2011, its users had uploaded about 400m photos or about 60 pictures per second, suggesting the sort of activity that Facebook seeks as it tries to wring revenue from mobile devices. Instagram launched its Android app just last week, garnering more than 1m downloads already.

As Instagram’s popularity has shot up recently, the company’s leadership has mulled possible strategies to expand the service into a fully featured social network — much like a photo-driven, stripped-down version of Facebook or Twitter, a company insider said.

Instagram is “a property that would have been amazingly valuable to not just Facebook, certainly Twitter was in the hunt as well”, said Lou Kerner, founder of the Social Internet Fund.

“I’m sure Google was interested as well. So to some degree an acquisition like this is both offensive and defensive. It would be a highly leveragable asset for anybody who wanted to compete against Facebook.”

Instagram has roughly a dozen employees based in San Francisco. Facebook, which is expected to raise $5bn via the largest Silicon Valley initial public offering by May, will acquire Instagram’s entire team.