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Is it time for Mark Zuckerberg to say, “I told you so”?
Instagram, the photo-sharing start-up he bought for $1 billion in 2012, has been valued at 100 times that figure by Bloomberg Intelligence. That, on paper at least, would mark an incredible return on investment.
Back in April 2012, Mr. Zuckerberg, Facebook’s co-founder and chief executive, drew a fair amount of criticism for the deal, which surprised both Silicon Valley and Wall Street.
First, there was the timing of the deal. Facebook announced the acquisition roughly a month before its initial public offering.
Then there was the price tag. It seemed rich at the time. As DealBook explained then, Instagram had closed a $50 million financing round the week before striking its deal with Facebook. That round valued the start-up at about $500 million — half of what Facebook paid. (The Wall Street Journal reported that the opening bid of Instagram’s chief executive and co-founder, Kevin Systrom, was $2 billion. The final cost to Facebook was actually a more modest $715 million because the stock on which part of the deal was based had fallen in value.)
Finally, there was the way the deal came together. Mr. Zuckerberg handled the three days of negotiations largely on his own and informed Facebook’s board about the deal only the day it was signed. The process raised questions about Facebook’s corporate governance and how it would operate as a multibillion-dollar, publicly traded company.
All the criticism and concerns have faded away. Instagram’s growth and revenue have taken off. Today if Instagram were a stand-alone company, Bloomberg Intelligence estimates that it would be worth more than $100 billion.
Here are some of the reasons the acquisition of the photo-sharing platform has turned out to be such a success.
In 2012, Instagram had 40 million users. That number has now reached one billion worldwide, and there is still room for it to grow. Instagram’s American user base is also expected to increase 13 percent this year, according to data from eMarketer — which based its estimate on numbers from research firms, government agencies, media firms and public companies, as well as interviews with top executives. Facebook’s, by comparison, is expected to increase by just 2 percent.
When Facebook acquired Instagram, the platform was entirely ad-free. Its first sponsored posts did not appear in feeds until 2013. Since then, Instagram has helped drive Facebook’s revenue growth — not least because Instagram’s user base skews younger than that of Facebook, which makes it more attractive to advertisers. Instagram is expected to generate $5.48 billion in net ad revenue in the United States this year — 70.4 percent more than it did last year, according to eMarketer. In fact, eMarketer believes that this year Instagram accounts for 28.2 percent of Facebook’s net mobile ad revenue, and that the slice will grow to as much as 40 percent by 2020.
Just last week, Instagram introduced a whole new video platform, called IGTV — which features longer clips, is focused on vertical video and plans to deliver footage from the stars of today’s digital video world. The push will square Instagram up to YouTube. And while there are as yet no details about when IGTV will include advertising, it could one day help the platform take a significant slice of lucrative mobile video ad spending — which is expected to reach $7.87 billion in America this year.
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