What The Tech Pundits Don't Get About Facebook's $1B Instagram Deal

There’s nothing more profitable than having a great, well-designed product. And somehow, that point has eluded many in the tech press.

It’s been baffling and aggravating to watch the tech press gnash their teeth about Facebook’s $1 billion acquisition of Instagram, a service that lets you add old-timey filters to your camera phone pics, and share them with friends.

This thick-headed post on CNET—titled "Facebook Buys Instagram…But For What?"—is a good example of the genre. In it, the author notices that other tech pundits seem to think that Facebook bought Instagram either for users, a better mobile presence, or to squash an upstart competitor. And then, she procedes to torch each one of these straw men. Instagram’s users and mobile mojo don’t mean anything, because they’re not monetized. As for competitors, the writer, in essence, says, "Who cares about filters? I bet most people don’t." Case closed! This Instagram thing is the worst idea in the world, the symbol of a bubble in the making. As if there were no other reasons for Facebook’s move.

But they do exist, and they have everything to do with design and product development.

In our recent coverage of Facebook, one thing is clear: The company views itself above all as a design-driven company. You can hate them for their actual designs—given all their talent, it really is surprising that Facebook isn’t better than it is. But they do think of themselves as user-minded and hyper-focused on product improvement. Therefore, you have to look at their purchase of Instagram through the lens of: How does Facebook think Instagram will improve their product. If you fancy yourself a great product company in the vein of Apple, that’s your lens, always.

Instant artiness, thanks to Instagram

Solving A Basic Problem Of Digital Life

From that viewpoint, Instagram’s accomplishments start looking pretty impressive. Consider these two competing facts about social-networking and picture taking:

  1. People take tons of pictures on their smartphones. But almost none of that content gets shared.
  2. The thing we all love most on the Internet is seeing other people’s pictures.

Instagram stepped into the gap. They managed to get people to share more of exactly what their friends want. And they did it simply by providing filters that allow people to turn any crappy old camera-phone pic into something resembling a snapshot by William Eggelston. In other words, Instagram is tapping creative instincts while eliminating the effort required to create something good. They’re satisfying our social-curiosity with pictures, helping us grab hold of fleeting moments that we might never share otherwise. They’re tapping into user emotions, which is probably the highest-aim of any smart company today.

Moreover, by allowing users to feel as if they’ve created something worth sharing, Instagram is helping users create an image of themselves as they’d like to be seen. They’ve turned the act of picture taking into a performance, whose message is: Look how cool my life is. Wasn’t that what Facebook did at one point, with all those Like pages and interests? But when was the last time you looked at Facebook and said, 'Wow, this person seems really cool?" Through dull designs and a straight-jacketed experience, the ability to convey who you are has leeched out of Facebook. Timeline was an attempt to solve that problem, but it’s not a magic bullet. Robert Fabricant, of Frog, just put that point to Inc. quite well:

I think Facebook is getting a little nervous about Pinterest, for instance. There is a new generation of meaningful social networks that are all about personal identity curation. Like Pinterest, Instagram understands that the future is photo-driven, and that those photos are about style and moments. Facebook is playing catch-up. It can either become this fundamental layer, the glue that holds this world together, or they can start creating better environments for users across the board.

I’ll bet that Instagram’s ultimate appeal to Facebook had a lot to do with the app’s road map—what features it would soon have and how it would evolve. Facebook, with an eye towards product improvement, would have seen all those changes with an eye towards how that road map could influence its own.

The Cracks Around The Edges

We’re now at a point where tech features aren’t all that interesting (even if the tech journalists only seem to write about them). When it comes time to buy an iPad 3, most people don’t care how fast it is; instead, they judge it by how fun it is to use. Features don’t matter nearly as much as user-experience. And here’s one stunning metric about how much users love Instagram: The app has a 5-star rating in the app store, on 70,000 votes. Have you ever seen a rating that high?

Tres, tres cool. Thanks to lots of filters.

That says great things about what Instagram has done so far. But the real question is how it will evolve, and how it could improve Facebook’s core product. Again, as Fabricant says, "There are so many possibilities for how Facebook could use Instagram. It’s not hard to imagine how good it could be. Then again, you never know."

The app is great because it is in such a simple stage in its development. It’s still not clear to me that they can improve that experience while dealing with the inevitable complexity that comes with scale—and there are worrying signs that Instagram won’t be able to do it, including clunky sharing pages and fussy UI details that seem far more complicated than they should be. Moreover, Facebook doesn’t have any track record of being able to absorb other companies and use them to improve their core offering. (This has always been a guiding strength at Apple, from its purchase of Steve Job’s Next operating system to, more recently, Siri, which went from being a surprise acquisition to a main marketing point with blazing speed.)

I’m not saying that the $1 billion price tag was fair: I do agree that the Valley is capable of burning money in ways that defy all common sense. Cash flow is the ultimate judge of how good a company is. But I am saying that viewing the deal simply through the lens of monetization and competing features is a good example of how tech journalists, tech investors, and even tech companies simply have no idea how to absorb design and product development into their world view. Users don’t give a crap if a service is going to make decent margins in the future. But they do care if a product is fun to use. And that is what ultimately makes a company great: It has to make great things.

Facebook doesn’t have a monetization problem. They’re making money with unbelievable speed. But they might have a product problem, and they’re dealing with that by trying to make design a part of their DNA. Still, we don’t know if they’ll be able to draw the best out of their own remarkable talent roster. Can Instagram help inspire them to do better?

[All photos by yours truly.]

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  • John Medcalf

    Instagram is totally subject to replication.  It will be replicated by a cool dude or dudette or two who don't want to be part of the Facebook data store.

  • adamkru

    I like seeing how everyone applies their value system to this situation to justify what is going on.  Let's not forget - that the purchase was made in cash and stock.  I doubt they paid much cash.  I'm gonna assume that some (smart) VC told Facebook to divest their (fake) valuation funds while they can, and rightly so.  If I was FB right now, I'd be tossing stock out left and right, buying up anything in silicon valley that has any potential value or even just an office of smart creative people.  Anything can happen post IPO.  Leverage the hype while you can. 

  • MyNewScreenName

    This purchase will be talked about for decades as the worst, most wasteful move by a tech company. Using its army of world-class engineers Facebook could have build something similar to Instagram for a fraction of the price.


    Really great analysis, Cliff. It does appear that many people missed the point. Facebook didn't buy code or a set of features, they bought a slick sharing mechanism and access to a passionate user-base. Plus, they've got a boat-load of cash right now. Why not make a strategic acquisition like that?

  • smb324

    What I'm intrigued about is Instagram was in the process of raising funds to make the Instaprint a viable product. How is this going to be affected by the sale to Facebook? Is the product going to be scraped or integrated? The printer is currently available for pre-order and they have a good chunk of the funds raised for the R&D and production.

  • Stefan

    Hmmm - so if it's all about the "coolness" of the design do you really think FB couldn't have developed its own filters for slightly less than $1bn? Secondly by definition "cool" is only cool if a relatively small portion of people (compared to the great unwashed) do it or have it. As soon as something cool is done by 850m people it's just not cool anymore as it becomes the norm - it is what everyone has and can do. The whole point of Instagram is to take away any need for skill or effort and hence take out the "art" of it. This works as long as there is a small group of people taking advantage of it. As soon as it becomes mainstream and everyone's photos on FB are all stylized we'll get bored very quickly.


  • Jmodio

    So you say: "There's all sorts of content that still isn't shared, that's locked away on people's phones" What is content, how important are these personal photos for users, for FB? In my Instagram feed, they're just photos from daily lives, of scenery, a concert or food. It's just something "cool" to share with your network, your friends, nothing really of too much value. Is there some statistic out there putting real value to these photos other than social sharing?

  • pjwson

    Correct me if I'm wrong. The thrust of your argument is that analysts have overlooked the main reason why FB wanted to acquire Instagram: it filled a service gap, namely, the ability to share photos with friends. Last I checked, half the "stories" in my "news feed" were friends' photos. So what exactly is it that FB acquired? The ability to post vaguely cooler-looking digitally filtered photos without having to use a third-party app?

  • Cliff Kuang

    But I'm actually saying: There's all sorts of content that still isn't shared, that's locked away on people's phones. Offering filters is one way of getting at it. There might be others. But one thing is clear: Facebook is keen on getting people to create as much content as they can, because ultimately Facebook is a content business, not just some nebulous "social network."

  • Dave Cole

    I think the design aspect of Instagram is obviously its core competency. There are plenty of photo-filter apps (I personally love Camera+ on my iPhone). 

    I think the timing of the deal was really what was interesting to me. Either FB gets this deal done now - at virtually any valuation they'd like - or they wait to post-IPO when suddenly every deal is scrutinized and shareholders expect quarterly-results. 

    They do the deal today, roll in those users, add on those features, and the investors get to take the whole thing. It's a non-story by IPO day. They do the deal post-IPO and I don't think they could've made it happen. This is a timing issue. 

    I wouldn't be surprised if FB has their sights set on several more companies (perhaps Tumblr, Pinterest, or Vimeo) to do a post-IPO acquisition run. In essence, the $1B valuation for Instagram was FB pre-spending IPO cash. It's always easier to spend other people's money.

  • Kevin Soon

    I've figured that Facebook knows where their flaws are, what they lack, and what they can afford (obviously at this point - the answer is clearly anything under the $1B price tag). If you can't engage users in a specific way - do the next best thing, pay for it. It seems to be a rather simple transaction. How it will play out in the future of both platforms? Not sure. Although I've always wondered if/when Instagram was going to expand and convert that simple landing page into a full blown social network - UI in tow. Now that's an idea seemingly worth investing in I suppose...I'm just a little shocked this didn't come from Google who has cash to burn and Picassa to boot.

  • Peter

    Excellent points about usable, design and peoples desire to share photos. FB does have a product problem and is a part of growing tech bubble. But by acquiring pieces like Instagram makes me as an investor more comfortable buying FB stock. Thanks for the great post Cliff.

  • Lana McGilvray

    The most provocative approach to digesting the deal I've come across Cliff. I quickly bored of the price per user, financial validity regurgitations. Bravo. You didn't question the value arguments. Sure, they are important. You took it to another level!

  • brand-e

    So, the nub of this article is Facebook is a design company which spent $1bn on a design company so that it would get to look better. Get outta here. For $1bn Facebook needs to get the design of the century. And know what? That's not never going to happen.

  • Tcumberford

    Facebook paid $1 Billion for this company.  According to their IPO filing, that's their entire earnings last year.  I agree with you that design is important and key for any success, but they've entered the world of Wall Street now that they've gone public and investors want to see profits.  Having 800 million users is impressive, but how are they going to earn more than $1 per user?  It's no longer about how many users you have, it's now about how much money are you making off these users.  Based upon their earnings last year, that was a hefty price tag to pay for this company, IMHO.

  • Josiah Gordon

    Part of the reason for the price may be that Zuck personally negotiated the deal. He's tried to get Systrom on board three times. Now, he was able to do it with monopoly money (pre-IPO shares) and really didn't care what the cost was.

  • atimoshenko

    A few points:

    1. You should never pay more to buy something than it would cost you to create the same thing yourself. Indeed, you should never even pay as much – ceteris paribus, creating is better than buying.

    2. One of the biggest attractions of Instagram was that it was simple, focused, and standalone. I.e. that it was not (part of) Facebook. Otherwise, there are plenty of iPhone apps out there (Camera+, Hipstamatic) that have great UI, allow you to take pictures, tweak them with nice filters, and share them on Facebook. The only reason I used Instagram (and quite extensively), was that it allowed me to share pictures while bypassing the other established social services. Same reason I use something like

    3. There is absolutely no indication that Facebook is talking up the importance of design for any other reason than that it's currently fashionable to talk up the importance of design.

    Hats tipped to Systrom and the rest of the Instagram team, of course – they built a great app and profited most deservedly from it. But the acquisition shows no particularly great insight on behalf of Facebook.