Facebook’s 2012 acquisition of Instagram (eight years ago today) was probably one of the greatest business deals ever made, and will certainly mark a milestone moment in the history of Silicon Valley, but most people don’t understand its significance or its genius. To be fair, most people didn’t have full context when the news broke, and—to be fair again—it’s taken a few years for the deal’s brilliance to blossom. So let’s catch you up on the historical deets, which (per usual) start before the beginning…
Facebook launched in 2004 and its first real competitor, Twitter, launched in 2006. Facebook has always been bigger, but Twitter has been different enough and successful enough to avoid falling under Facebook’s shadow. (As we said before: Twitter is for watching the forest, Facebook is for watching the trees.)
Instagram launched in late 2010 and quickly became popular, racking up its first million registered users in just two months. Both Twitter and Facebook started salivating over this opportunity—not just Instagram’s quick ascent and fresh user base, but the nerve it clearly struck in the social-media market. Early IG users did a lot of cross-posting on Twitter, so Twitter would have seen a chance to evolve its social game; Facebook had been working on a Camera app for mobile-photo sharing and Instagram was basically the same thing, except better and already successful.
Here’s where things get interesting. Around 2011, Facebook is nervous—not because of Twitter or Instagram by themselves, but because (A) Google+ enters the social fray, which means Facebook is suddenly competing with someone bigger, and (B) Facebook realizes they’re in deep trouble if any of the other three players combine. So Zuck does something smart: he develops a friendly, supportive relationship with Instagram CEO Kevin Systrom over the course of several months. And it pays off in the most valuable way imaginable: when Twitter makes an offer to buy Instagram, Systrom says “please hold” and calls Zuck to tell him.
To be specific: Twitter made a $500 million offer on Friday, April 6, 2012. Later that same day, Zuck had Systrom over to his house in Menlo Park, where they shook hands on Facebook’s offer of $1 billion. Then Zuck called Amin Zoufonoun, Facebook’s head of corporate development, and asked him to fast-track the acquisition; the two banged out all the paperwork (which usually takes weeks to complete) that same weekend. Facebook formally announced the acquisition on Monday, April 9, 2012, early enough that Facebook’s lead dev on the Camera app heard the news from his wife while he was in the shower.
The significance and value of this deal was not immediately apparent. Instagram’s popularity aside, it had been operating for less than two years, it produced no revenue, and it had only 13 employees; Facebook’s timing also seemed strange, since the purchase came very shortly before Facebook’s IPO. (Instagram was Facebook’s first big purchase, yet they made it before the IPO flooded them with cash; also, an IPO is when you want investor confidence highest, which usually means “no sudden moves.”) But when we say it’s one of the greatest business deals ever made, we’re not exaggerating—and to prove the point, we’ll list just a few things Facebook got for their $1 billion (which, remember, is paltry in the grand scheme):
1- Elimination of the threat. An ounce of prevention is worth a pound of cure. Facebook signed the new all-star, Twitter remained the smaller team, and Google+ died. Facebook’s size in 2020 proves that it’s prevented a lot of big threats, and by now Facebook is (in many ways) too big to be threatened.
2- A good photo-sharing app with a strong mobile presence. 2012 is about when mobile (web) traffic started surging hard—in other words, when you started needing a solid mobile presence to get ahead of the curve. It’s also when Facebook was struggling on mobile. So the purchase of Instagram, aside from finishing the Camera project, gave Facebook instant strength in their greatest area of weakness.
3- A second, totally-separate advertising pool (which continuously mints cash). Facebook’s advertising ecosystem is huge, but it can only expand so much on its own. In simple terms, Instagram doubles Facebook’s ad-rev potential because it provides a second ecosystem for ads (which included 30 million users with purchase and now has over a billion). But what made this opportunity even juicier to Facebook is the fact that Instagram had never run ads at all—meaning that none of IG’s advertising value had been mined out or even touched yet AND that Facebook would have full latitude to do it their way.
4- Freedom to cross-pollinate and double-dip their users. With just one platform—even a gigantic one like Facebook—you can only sell more ads if you have more people to show them to. But if you have two platforms, you have two pools of people to grow—and if they overlap, any users on both platforms count twice (once for being able to see FB ads, once for being able to see IG ads). In theory, this “double-dipping” potential becomes increasingly valuable as users get sent back and forth between platforms and the proportion of dual users (on both FB and IG) increases.
5- Silicon Valley street cred. Facebook’s decisive play had the same unmeasurable-but-undeniable effect as trouncing the toughest prisoner in the yard. This is the deal that proved Facebook was a serious and visionary company—not just to the other players in Silicon Valley, but to entrepreneurial and tech talent looking for a flag worth saluting. Former Facebook marketer Mike Hoefflinger believes the purchase proved that Facebook could move multiple big balls at once, and that later acquisitions like WhatsApp and Oculus wouldn’t have been possible without the earlier IG acquisition.
In 2010’s The Social Network, an apocryphal telling of Facebook’s founding, mentor Sean Parker famously says (paraphrasing) that a million dollars isn’t cool; a billion dollars is cool, and that’s where Facebook was headed. In hindsight, that seems oddly prophetic—especially with the twist that $1 billion became the price of Facebook’s coolest purchase, and not the price of Facebook itself.