Facebook has acquired Instagram, an extremely popular mobile photo sharing platform for $1 billion in cash and equity.  Instagram was a 15 month old startup which had attracted more than 30 million users on Apple‘s (NASDAQ:AAPL) iOS in less than 15 months, and more than a million users on Google‘s (NASDAQ:GOOG) Android in a day following the launch of its app on the platform. While it was still quite small compared to Facebook or Yahoo‘s (NASDAQ:YHOO) Flickr, the top image sharing platforms on the web, it was growing incredibly fast, and continued to see high user engagement levels despite the presence of scores of similar services.
This quick acquisition at an eye-popping valuation begs the question – why would Facebook acquire Instagram? 
Instagram propels Facebook to the top of the mobile photo sharing space
After all, Facebook already has a much larger user base – more than 845 million users. Most of Instagram’s user base is probably already using Facebook, so it couldn’t be only to acquire new users.
Though Facebook had a much bigger user base using its platform to share photos, Instagram had the potential to become much bigger, given the really addictive interface and integration across all major social networks like Facebook, Twitter and others. While Instagram gathered a loyal user base of more than 30 million users on iOS, it was poised to explode in the next couple of weeks following its launch on Android, the largest smartphone platform in the world.
Instagram also released its API a few months ago, which enabled other apps and services to use the Instagram platform, positioning it as the ultimate, cross-platform photo sharing service. Given Instagram’s tremendous growth on mobile, and Facebook’s relatively low market share in the mobile photo sharing space compared to online photo sharing, acquiring Instagram was probably the best way for Facebook to become the dominant photo sharing service across all mediums.
This would also explain the seemingly high valuation at which Facebook acquired Instagram. Instagram finished raising $50 million at a $500 million valuation just a day before Facebook acquired it. Facebook must have had to shell out twice as much just to get them to sell quickly – within a day – without getting other giants like Google or Apple involved in a bidding war, which could have ultimately led to an even higher valuation.
The road ahead…
Given Facebook’s checkered past when it comes to acquisitions, it’s not easy to predict how Instagram will end up. Facebook, on its part, has stated that it will continue to run Instagram separately, and allow users to post on other social networks. However, we expect it to eventually integrate it with the Facebook mobile apps, or at least leverage it in some way to increase Facebook usage on mobile at the expense of other social networks.
Either way, with the Instagram acquisition, Facebook now has a good chance of running circles around its competition when it comes to the photo sharing space.
A change in Facebook’s acquisition strategy?
Until now, Facebook has acquired only small startups primarily aiming to acquire the team, or integrate new features into its service. But now, we are seeing a new Facebook, with deeper pockets, which after the IPO will have even more cash to acquire smaller rivals in order to continue at the scorching pace it has in the past, without having to rely only on organic growth. Even though Mark Zuckerberg says that they “don’t plan on doing many more of these” acquisitions, Facebook could now use the cash from its IPO to kickstart further growth into other verticals beyond only social networking, becoming an even bigger threat to Google, which should already be scared of Facebook’s social search threat to its dominance in the search space.
We currently have a $82 billion valuation for Facebook, based on the discounted cash flow valuation of its advertising and virtual transactions businesses.Notes: