April 11, 2012 4:10pm – On April 9, privately-held Facebook Inc. secured its biggest acquisition to date with a massive $1 billion dollar purchase of photo-sharing company Instagram. While the purchase represents less than 1% of Facebook’s over $100 billion valuation, the Instagram acquisition shattered Facebook’s previous acquisition strategy which focused largely on bite-size “acq-hires” – a process of buying a small company to assume its talent rather than business.
In announcing the Instagram acquisition, Facebook founder and CEO Mark Zuckerberg quickly noted, “It’s the first time we’ve acquired a product and company with so many users. We don’t plan on doing many more of these, if any at all.”
However, PrivCo, the Private Company Financial Data Authority, believes that Instagram is just the first on Facebook’s shopping list of defensive acquisitions. In Silicon Valley, young tech companies pose the constant threat of ballooning and overtaking an established player. By missing gaming-giant Zynga in 2010, Facebook lost the opportunity to dominate the social game-space, and the Instagram grab demonstrates Facebook’s lesson learned – it would not lose photo-sharing too.
With Instagram, Facebook gained a rival whose stylized photo-sharing capabilities were beyond its own. Additionally, Facebook gains an easily monetizable major mobile player (Instagram has 30 million iOS users and a rapidly expanding Android base) – an area where the social media giant has traditionally struggled.
Soon to be flush with IPO cash, PrivCo believes that Facebook will set its sights on two young rivals – Pinterest and Tumblr – whose interactive platforms also threaten Facebook’s core offerings.
A defensive acquisition of Pinterest, an online idea and image-sharing site, would eliminate a direct threat to Facebook’s media sharing and user engagement dominance. With over 80% of pins “re-pinned” and 12 million unique monthly users coming from outside of Facebook’s core demographic, a strategic acquisition of Pinterest reinvigorates Facebook’s waning engagement and extends the social media giant’s reach into a lucrative new demographic – middle aged women. Furthermore, ad-free Pinterest runs at a similar loss to Instagram but could easily be monetized to create new cash-flows for demanding new shareholders.
Acquiring Tumblr eliminates a threat from the online-publisher’s platform for self-expression which is more comprehensive than a typical Facebook post. Though Facebook increased its maximum post length 11,900% from 500 characters to 60,000 in 2011, Tumblr dominates the blog space. Facebook recently eliminated its unpopular long-form “Notes” feature and lengthier posts are often clipped by the Newsfeed. Acquiring Tumblr creates a missing synergy in user expression and fills that hole in Facebook’s repertoire. Finally, similar to Instagram and Pinterest, Tumblr’s focus has been scale over revenues, and therefore offers Facebook another stream of advertising cash.
The sporting adage “the best offense is a good defense” has never rung truer in Silicon Valley. Recent defensive tech acquisitions such as Google and Youtube have been less about gaining a revenue stream and more about eliminating the competition early. In purchasing Instagram, Facebook eliminated a competitor whose niche photo-sharing offering outshone its own. Facebook’s next post-IPO step should be to protect the direct threat of its core with relatively inexpensive (though potentially bloated as we saw with Instagram) defensive acquisitions of Pinterest and Tumblr.
Read PrivCo’s Full Private Company Report on Facebook Inc.
Watch PrivCo CEO Sam Hamadeh Discuss Facebook on Bloomberg News
