With a pricey acquisition of the tiny startup, Facebook is likely out to strengthen its position in social networking on mobile devices.
Facebook, the world’s largest social network, said it had agreed to buy Instagram, the popular mobile-centric photo-sharing service, for $1 billion in cash and stock, giving it a stronger foothold on mobile devices. It would be Facebook’s largest acquisition to date by far.
“For years, we’ve focused on building the best experience for sharing photos with your friends and family,” Facebook’s chief executive, Mark Zuckerberg, wrote on his Facebook page. “Now, we’ll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests.”
Instagram is a social network built around cellphone photos. It lets people add quirky filters and effects to their snapshots and share them with friends, who can “like” and comment on them.
The service has been something of a rising star in the startup world. Barely 2 years old, it has attracted close to 30 million users, even though it worked only on iPhones until last week, when it released an Android version of its app.
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Despite Instagram’s tremendous traction — more than 5 million photos are uploaded each day — the company, which is based in San Francisco, is still tiny.
For much of its existence it has had fewer than seven employees, and it only recently topped 10.
By way of comparison, Foursquare, another cellphone-focused social network, has nearly 100 employees serving 15 million users.
Facebook has been interested in Instagram for some time. In early 2011, Zuckerberg reached out to Instagram to discuss possibly purchasing the company, but Kevin Systrom, chief executive of Instagram, chose to keep it independent and focus on expanding it, two Facebook engineers, who asked not to be named, said in August. At the time, Instagram had fewer than 7 million users.
Although Facebook has tended to write much smaller checks in the past, Instagram’s surging momentum likely compelled it to make the billion-dollar deal.
Last week, Instagram closed a $50 million financing round with several prominent investors, including Sequoia Capital, an early backer of Google; Thrive Capital, the firm run by Joshua Kushner; and Greylock Capital, an early investor of LinkedIn.
The round valued the photo service at about $500 million, according to one person with knowledge of the matter, who requested anonymity because the discussions were private.
With Facebook’s purchase, one week later, that investment has now doubled in value. Previously, the company raised $7.5 million in a round led by Baseline Ventures and Andreessen Horowitz.
Rebecca Lieb, an analyst at the Altimeter Group, described the Instagram acquisition as central to one of Facebook’s most urgent needs: how to make its service more appealing on smartphones.
“It’s easier to update Facebook when you’re on the go with a snapshot rather than with text,” Lieb said. “I think it’s definitely a mobile play.”
As more and more people log onto Facebook using mobile devices, Facebook is faced with the challenge of figuring out new ways to make money from the small screens.
“We really don’t know how Facebook will monetize mobile platforms,” Lieb said. “The first step is to make Facebook friendlier on mobile devices, and this will certainly do that.”
Some Instagram fans quickly expressed concern about the fate of the service, since it is not uncommon for Facebook to buy a small startup and then shut down its service, as was the case with FriendFeed, Hot Potato and most recently Gowalla, a location-based app.
One such user, Giovanni Gallucci, said on Zuckerberg’s page: “I assume it’ll see the same fate as Gowalla. Oh well — it was fun while it lasted.”
But Zuckerberg said that Facebook planned to keep Instagram up and running as a separate service for the time being.