The news that Facebook is paying US$1 billion to acquire imaging app Instagram raised some eyebrows, primarily for the sums involved. For a company started just a few years ago, with little more than a handful of employees, the reward for success has been staggering.
Instagram stands among a handful of apps which have crossed-over to become mainstream successes, notching up 30 million users from the iOS platform alone. It has swiftly become more than just another app, a feat which numerous other developers are working hard to achieve – even if few will ever succeed.
In the past, some observers have compared achieving this level of success to winning the lottery or striking oil – hugely lucrative, but enormously unlikely. But that certainly doesn’t stop people trying, especially as unlike winning the lottery, the mobile app industry is not all-or-nothing – even if building a lucrative business is something of a challenge.
Unsurprisingly, attention swiftly turned to who the next acquisition target may be. And while there were some obvious candidates (with Pinterest, Path, Evernote seeming to be popular options), in general there are few app developers with the reach to generate such a premium – a look at the charts shows that top spots are already generally occupied by the big boys.
This certainly puts the successful, but still independent, developers in a strong position, especially if their apps fit with the strategies of a Facebook, Google, Apple or Microsoft. Whether Facebook sees Instagram as a way to extend its existing operation, or to protect it, either way it sees enough value to splash the cash (and stock).
While there may only be a few potential buyers, there are enough to drive up valuations. And with a limited number of targets, there will be little in the way of alternatives for the happy shoppers.
One of the most appealing things about the mobile apps industry is the fact that the “next big thing” could come from anywhere, and not just from a heavily-backed start-up created by Google or Facebook alumni. But that also makes it extremely difficult to see where the next big success will come from, in order to get on board at an early stage. And for every Instagram or OMGPOP, there will be thousands of unsuccessful rivals who will be unlikely to generate much interest from a buyer.
The Instagram deal highlights how apps, and supporting technologies such as cloud computing, have changed the way in which companies can do business. Not that long ago, the idea of supporting 30 million users with just 13 employees would have seemed unthinkable, and the idea that a company of this size could have gained the traction it won in the amount of time it did, likewise.
But the increasing availability of APIs which enable developers to integrate with other services, to provide best-of-breed features without the need to build their own, supported by cloud infrastructure which can scale with the user base, has changed this. And, significantly, the cost of building a business can now be more accurately matched to growth and (ideally) revenue, rather than requiring heavy speculative investment up-front.
Perhaps the biggest challenge of an acquisition is the integration which follows. Faced by a desire to maximise the oft-trumpeted “synergies,” it is all too easy to lose what originally made the target special. Instagram was already facing criticism from some iOS users after launching an Android version of its app, who felt that this led to a loss of exclusivity. With the company now set to become part of the social networking behemoth that is Facebook, it is unsurprising that this, too, sparked a barrage of complaints.
With its previous acquisitions such as Beluga and Gowalla, Facebook has opted to close and integrate the businesses, rather than keeping them alive as separate products. It will face a new challenge with Instagram, in how to maximise the benefits of the deal for shareholders following its planned IPO, while honouring its pledge to maintain the existing service.
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