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Facebook buys Instagram for a cool billion

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

Facebook just announced that it's acquiring Instagram, the photo filtering and sharing app-maker, for — wait for it — $1 billion! The deal is in cash and shares, although given that Facebook doesn't actually have public shares yet, we'll have to assume that the stock part is coming from Facebook equity that now trades on private markets. Safe to assume that this equity will convert to Facebook stock when the company launches its much anticipated IPO later this year.

Instagram is only about two years old, but its users are sending upwards of 5 million photos a day to sites like Facebook and Twitter. A $1 billion valuation implies revenues of 200 million (at a conservative five-times multiple), which is just off the charts for a company so young. Particularly since Instagram is generating profits of exactly zero.

Its funding raises up to this point amount to around $7.5 million, and the word back in 2010 was that its valuation was about $20 million. That seems to have risen...somewhat, even beyond a new, rumored valuation based on new funding rounds of $500 million.

At the price Facebook paid, the return on the existing investment is...13,000-plus percent.

Why is Facebook is buying Instagram? Here's Mark Zuckerberg himself, from his Facebook post on the news. He emphasizes that Facebook isn't going to inhale Instagram, but rather continue to let it operate on its own:

[W]e're committed to building and growing Instagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.

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

These and many other features are important parts of the Instagram experience and we understand that. We will try to learn from Instagram's experience to build similar features into our other products. At the same time, we will try to help Instagram continue to grow by using Facebook's strong engineering team and infrastructure.

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. 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.

Over at Instagram, they're understandably "psyched."

Facebook is basically running up the white flag here and admitting that it can't homebrew a decent Instagram alternative that's native to Facebook. The New York Times' Nick Bilton reported last year on the "photo-filter wars":

Facebook plans to add a series of photo filters to its mobile application in the coming months with the hopes of drawing  off fans of Instagram, the popular photo-sharing application.

The new feature has been ready for some time, according to two engineers who work at Facebook, but Mark Zuckerberg, Facebook’s chief executive, hopes his engineers and artists create more filters before releasing the new product. Both Facebook engineers asked not to be named as they are not allowed to speak publicly for the company about unannounced products.

The engineers said Facebook will introduce almost a dozen photo filters, including some that are similar to Instagram like old-style camera lenses and grainy film. Facebook will also try to introduce new styles of filters with the hopes of drawing users away from other photo apps.

The engineers also said that Facebook attempted to acquire Instagram over the summer, but to no avail.

Instagram was clearly wise to wait for Facebook's photo-filter efforts to flounder as Instagram's flourished. It was also obvious that Facebook biggest future rivals, Apple and Google, were moving into Instagram competition/collaboration. Apple by adding filtering to its iOS mobile software, according to Bilton, and Google benefitting from a gangbusters Instagram launch for Android.

So did Facebook overpay? Of course. But Facebook is becoming more and more of a photo-sharing site, with those photos coming from the mobile environment. As we learned from Facebook's IPO filing, the company has almost no revenue coming in from mobile. It needs to move rapidly into that space, as mobile apps replace the desk-bound Web. So for Facebook to make good on its $100 million valuation, it has to be plugged into what Instagram can do and it seemingly can't. 

That said, Instagram has to be something that Facebook is looking at as a sharing platform or system with a gajillion users. If it's spending $1 billion for...photo filters, a neat gimmick, then, well...we could genuinely be looking at tech bubble that rivals anything we saw in the late 1990s.

UPDATE: Business Insider notes that back in February, it said Instrgram was Facebook's biggest threat. Instagram = FAST! Facebook = s....l...o...w...

UPDATE 2: The more this is getting chewed over, the more I think Facebook is (a) solving its mobile photo uploading problem and, more importantly, (b) buying millions of Instagram users, thereby creating an instant mobile community that it can plug more directly into Facebook.

Follow Matthew DeBord and the DeBord Report on Twitter.

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