Is $1 Billion a Crazy Price To Pay for Instagram?

Facebook’s billion-dollar aquisition of Instagram has sparked talk of a new bubble in Silicon Valley. That could be right, but it doesn’t seem like an obviously insane amount of money to spend.

Consider that right now Instagram has 27 million users despite just having become available on Android last week, making this an acquisition worth about $37 per existing Instagram user. But Instagram is poised for continued expansion. After all, we’re talking about a world where the majority of Americans still don’t own smartphones, and where the majority of the world’s population lives in countries that are much poorer than the United States. Instagram has, in other words, enormous growth potential if the service can be scaled at a high quality. Facebook absolutely has skill and expertise in scaling-up Web services without breaking them. And the entire premise of Facebook as a business is that the network and lock-in effects in the “social” space are huge. There’s no real extra risk being taken on by doubling down on that theory. On the contrary, the risk to Facebook is that it might be subject to some form of low-end disruption. No social network can go toe-to-toe with the company, but a more limited service provider that’s also “social” can gain adherents and could, in principle, start becoming more elaborate once it builds the user base. Taking promising new fast-growing social applications, taking them under the Facebook wing, and using Facebook’s technical expertise to ensure that the Facebook-owned version scales more smoothly than any rival is a smart strategy.