Was it a mistake for Instagram to sell to Facebook?

One interesting thought experiment, when reflecting on the current state of the app economy — and especially the degree to which Google and Facebook have amassed seemingly impenetrable barriers around much of the mobile advertising market — is to consider whether Instagram, which was acquired by Facebook for $1BN in 2012, sold too soon. As of September, Instragram had 800MM MAUs and 500MM DAUs (which makes for a notable 63% DAU/MAU ratio), up by an impressive 200MM DAU over its position roughly one year before that, when it launched its Stories feature. Instagram Stories was a feature borrowed somewhat shamelessly from Snapchat in an attempt to usurp the latter’s younger user base: the gambit worked, as the number of people using Instagram Stories eclipsed the size of Snapchat’s entire user base and Snapchat posted a number of disappointing quarters.

800MM DAUs is extraordinary: it is more than double the size of the entire mobile catalogue of King, the developer behind Candy Crush Saga; it is more than double the size of Twitter; it is more than five times the size of Spotify’s user base; and it’s more than 200 times the size of Lyft’s user base as of December 2016, a few months before it raised $600MM at a $7.5BN valuation. All of these companies are valued at well more than $1BN; surely, with its massive user base, Instagram is worth well more today than the $1BN that Facebook paid for it in 2012. Did Instagram sell too soon?

Of course, these comparisons are facile: these companies are all different types of businesses with different business models and monetization mechanics. But Snap, whose Snapchat app might be Instagram’s closest philosophical analog, currently has a market cap of just under $15BN. Snap fended off a $3BN takeover bid from Facebook and went on to create a $15BN business, despite Facebook’s relentless kneecapping attempts over the past year. Couldn’t Instagram have done the same and built a business worth much more than $1BN?

There are a few things to unpack here in making that determination. The first is the intensity of Facebook’s competitive fervor, which I call the “Carthago delenda est” effect. Facebook can tolerate the existence of an ascendant social, mobile service, even if it competes with it obliquely, up to a point. Once that service reaches that point, Facebook commits to obliterating it absolutely: its current ferocious campaign against Snapchat is a contemporary example of that, but its war against Google+ is also instructive. So to determine that Instagram would have been able to grow into a company worth well more than $1BN assumes it would have survived Facebook’s onslaught at some point. It’s important to keep in mind that Instagram only had 30MM users at the time it was acquired — and growth was slowing. It’s not unfair to put non-trivial odds on Facebook’s ability at the time to wipe the company completely off of the face of the Earth.

The second thing to unpack is an understanding of what business Instagram, Facebook, Snapchat, etc. are in. These companies serve ads: that’s how they make money. And Facebook is better than almost any company on the planet at turning behavioral and demographic user data into insight that can be advertised against in a visual feed. Feed-based advertising is Facebook’s home turf: competing against it is very difficult, but partnering with it can unlock untold value from feed real estate. Would Instagram be worth as much as it is today without Facebook’s data infrastructure, ad serving tools, and product support? Almost certainly not. But would it be worth more than $1BN? After all, Snap is.

The only reasonable answer here is “Who knows,” but I think there’s a case to be made that Instagram would not be worth materially more than $1BN now. Musical.ly, which is a video-sharing app popular with teens, was recently acquired by Chinese company Bytedance for around $1BN. Musical.ly allegedly has 60MM MAUs on a lifetime install base of about 200MM. tbh, another app popular with teens, was recently acquired by Facebook for (allegedly) $100MM on a DAU base of 2.5MM. These are both ascendant mobile properties showing strong user base growth; why sell if Snap was able to IPO and is worth $15BN? I think the reason is that Snap pulled the ladder up behind it in terms of going public with a company that competes directly with Facebook, which might mean the only exit opportunity for these types of companies (read: mobile social media / messaging / community) is an acquisition before they come into Facebook’s crosshairs.