(I’m starting a new series on B2BS that provides historical retrospectives on events. Today marks the 14th anniversary of Facebook’s announcement that it would acquire Instagram. Here’s a look back at the circumstances that surrounded that announcement and acquisition – and the lessons that can be gleaned accordingly. - JS)
On Monday, April 9, 2012, Facebook (the company’s name before it rebranded as Meta in 2021) announced that it would acquire Instagram. At the time, Instagram was a tiny company – pre-monetization, mind you – inhabiting the then oversaturated space of hipster-friendly photo-sharing apps.
That wasn’t the news that sent the world into a “WTF is Mark Zuckerberg doing?” tizzy. The purchase price was: $1 billion (partly in cash, partly in shares of Facebook stock; by the time the deal closed in September 2012, Facebook’s stock price had fallen, making the final price tag closer to a still enormous $715 million).
Only days before, Instagram had pulled off a $500 million valuation in a Series B – an eyebrow-raising figure to startup skeptics. But a billion dollars? Twice the valuation? For a photo app? WTF was Mark Zuckerberg doing?
Today, the move looks obvious. Instagram and Facebook are the two lines of business that keep the lights on over at Meta; Business of Apps reported that Instagram and Facebook accounted for $159 billion of Meta’s $164.5 billion in 2024 apps revenue. (Reality Labs – Meta’s XR segment – contributed only about $2 billion in revenue, according to Bullfincher.) A billion dollars for what would quickly become (and remain) one of the most popular social networks in the world seems well worth the investment now.
But at the time, tech journalists called it “insane” and stirred fears of a tech bubble. Those in the popular tech punditry who thought it was a good deal for Facebook were a distinct minority.
Andy Baio was one of those dissenters. In a column for Wired, Baio defended the decision, arguing that critics were focused on the wrong metrics.
The problem, as Baio put it, was that the media and analysts were assessing the purchase price on a per-employee basis. At almost $77 million per employee, the price seemed beyond astronomical.
“Some would point to this as a sign of a bubble, but I think it’s more likely it just reflects the incredible scalability of modern app architectures. Using EC2 and solid monitoring, Instagram can quickly scale up to support a million new users overnight with very little additional engineering effort,” wrote Baio. “Instagram’s numbers are exactly what you’d want to see in a social network – high user counts with the lowest number of employees.”
Indeed, Baio argued that that it was more appropriate to analyze the deal on a per-user basis. To demonstrate this, Baio analyzed data and estimates “from a selection of 30 notable internet acquisitions” in recent years, including CNET, Geocities, LiveJournal, Mapquest, OMGPop, PayPal, StumbleUpon, Zappos, and others.
Baio reported that the estimated median per-user purchase price of these acquisitions fell at about $92 – whereas $1 billion for Instagram represented a purchase price of about $28 per user. (Instagram had about 35 million users at the time of the April 2012 announcement.)
Compare (per Baio’s estimates and analysis):
Google spent over $555(!) per user for Aardvark, about $240 per user for Jaiku, $100 per user for Blogger, and a little under $50 per user for YouTube.
EBay bought Skype for over $240 per user.
Amazon bought Zappos for over $200 per user.
AOL bought Mapquest for almost $300 per user.
Yahoo, which never met an acqui-kill it didn’t like, spent $150 per user for del.icio.us, over $830(!!) per user for Geocities, and nearly $11,000(!!!) per user for Broadcast.com.
Baio also pointed out that, of all the companies he compared, Instagram had by far the lowest employee-to-user ratio – at 1 employee per 2.07 million users.
The next closest was OMGPop (best known for the mobile game Draw Something), which had 1 employee per 875,000 users when Zynga acquired it for the tiny per-user price of $6. (The highest employee-to-user ratio of these companies? Aardvark, with 1 employee per 1,800 users.)
“More than anything, the app ecosystem rewards efficiency: the ability to massively scale with very little engineering effort,” wrote Baio. “I’m guessing these ridiculously lean startups with huge exits aren’t a freak occurrence. We’ll see more of them as the rest of the world catches up, and learns how to do more with less.”
Speaking for myself, Facebook’s deal for Instagram looked good to me too – and I wrote as much in the column I had at the time – because of the competitive landscape as it then stood. Zuck didn’t need Instagram just because it looked shiny in some fever dream. He needed it to solve several discrete problems – one of which began with “G” and ended with “oogle+”.
Younger readers aren’t likely to remember that Google briefly had its own highly trendy social network that directly competed with Facebook. So let me explain what Google+ was like:
Facebook, but with lots of empty white space.
That was Google+ at its core. You would give a post a “+1” instead of a “Like,” and you would add friends to “Circles” instead of “Lists,” but otherwise it may as well have been called Facegoog or Googbook or Larry Page’s Not-Facebook-But-Really-Facebook Brought to You by Google. If Facebook was McDonald’s, Google+ was McDowell’s.
But there was one critical differentiator that Google+ had: Hangouts.
To Google’s credit, Google Hangouts represented a standout feature. At any time, you could pop onto Google Hangouts and livestream yourself on video. Then, several people could join your Hangout, livestreaming themselves. You could have up to 10 people on a Hangout, each located virtually anywhere in the world, for an indefinite period of time. Public or private. For free.
Users found ways to get around the 10-person limit by daisy-chaining Hangouts. People hosted talks, concerts, and even game shows on Google Hangouts. (I was once a contestant on one hosted by New Hampshire writer and artist John Herman. I didn’t win.)
In a world before Zoom and TikTok, this was huge. Only a few small apps and websites supported multiway video calls, and their free tiers tended to have ads. Skype supported “conference calls” but you had to pay for them. Hangouts represented the one original thing Google+ had going for it.
As Google was pioneering the future of social video (oh, yeah, and it owned YouTube – which I guess is also a social network), the other Big Tech companies were still pissing all over each other to be king of Photosharing Mountain – as was Google itself, via Google+ Photos. Meanwhile, there were rumors at the time that Google was sniffing around Instagram for an acquisition of its own.
Facebook had another problem too: Yahoo, which actually was king of Photosharing Mountain insofar as it owned Flickr.
Not that that position was secure. One must imagine that Yahoo’s senior leadership knew what a tenuous position Yahoo was in. There was a lot of photo-sharing competition, Instagram was growing like the Little Shop of Horrors plant on steroids, and Yahoo was – well – Yahoo. That company’s board of directors – and at least half of its CEOs – could have fucked up a ham sandwich.
Flickr was the MySpace circa 2008 of photo sharing – technically still number one, but on its way out.
(Incidentally, Baio reported that Yahoo spent over $110 per user to acquire Flickr – a bit more than the median in his analysis.)
So what did Yahoo do? What any innovatively stagnant, commercially flailing tech company would do in a tough competitive spot: declare a patent war.
In this, Yahoo actually displayed some competence – waiting for the perfect moment.
Facebook, in preparation for its IPO, filed its S-1 on February 1, 2012. As soon as that document was filed, Facebook was locked into its mandatory IPO “quiet period,” legally hamstringing its public communications. Less than four weeks later, Yahoo sent a demand letter in late February to Facebook for licensing fees for alleged patent infringements. Less than two weeks after that, the demands being unmet, Yahoo filed a multi-count patent-infringement lawsuit against Facebook.
Sure, Facebook could, and did, do the usual stuff – countersue, accusing Yahoo of infringing on Facebook patents, while going on a huge patent-buying spree. But sitting there within Mark Zuckerberg’s reach, like a nice juicy ham sandwich, was Instagram – potential weaponry for a protracted war of attrition.
But Twitter was already reaching for it. In early 2012, Twitter CEO Dick Costolo was literally wining and dining Instagram cofounder and CEO Kevin Systrom, offering to acquire Instagram for between $500 million and $700 million in Twitter stock.
Back then, Instagram and Twitter, from a user perspective, had a close relationship. Instagram used Twitter’s API to let users automatically post a tweet embedding an Instagram photo. This was a popular feature; if you were a Twitter user at the time, chances are that your Twitter feed was plastered with Instagram photos. (Facebook did not have this feature. If you shared an Instagram post on Facebook in Q1 of 2012, you were sharing an off-platform link.)
So a Twitter x Instagram deal made sense.
But Systrom and Zuckerberg had long been business flirting – regularly having phone calls with each other. On Friday, April 6, 2012, Systrom told Zuckerberg about Twitter’s offer.
Faced with all of the above pressures, it was a now-or-never moment for Zuckerberg.
Zuckerberg invited Systrom over to his house, where the two worked out a handshake deal for a billion-dollar acquisition. Reportedly, after Systrom left, Zuckerberg had his head of corporate development come to his house – where the two spent the weekend putting the necessary documents together.
Facebook’s April 9 announcement was a surprise attack on every major player in Silicon Valley.
And it worked out well for the company.
Google+ is dead.
Yahoo and Facebook settled their patent litigation later the same month for no cash consideration. Yahoo’s core business would go on to get acquired by Verizon in 2017 for a relatively paltry $4.83 billion (for perspective: Yahoo almost certainly would have made more money had they sold their core business in 2012 and invested the proceeds in an S&P 500 index fund over five years). Today, Yahoo is less than a shell of its former self.
Twitter and its investors admittedly had a highly successful exit, but only by annoying the richest man in the world so much that he wanted to buy it (and this after Twitter had scared away several would-be acquirers in 2016 because the platform had become a cesspool). Reportedly: Twitter had lost over $1.4 billion in its lifetime (or over $2.9 billion, if you go by operating income) by the time Elon Musk bought it – and hadn’t shown a profit since around the start of the pandemic. Twitter was a de facto Ponzi scheme that accidentally worked out.
Instagram now generates more revenue than all of Meta’s other revenue streams combined, according to an Emarketer forecast. It’s hard to imagine Meta being a relevant Big Tech player today – let alone one of the reigning champions of Silicon Valley – had Mark Zuckerberg not been willing to pony up $1 billion as soon as he sniffed a makeable deal.
1. Naysayers are not very good arbiters.
History is rife with examples of supremely successful people having been rejected early on, told that their ideas or approaches were no good.
You don’t need to please the majority of people, or even certain people. You just need enough support from enough people who are relevant.
PR is important, but tech bros don’t make money off of pundit popularity contests. They make money off of advertisers. Zuckerberg didn’t need to impress Jimmy the j-school grad; he needed to impress advertisers with his company’s reach and power – and he knew that he needed the tech, the platform, and the users to do so.
Apple is another great example. The company sells polarizing products that, strictly speaking, lack market domination – and yet it was the first company to reach a $1 trillion market cap and is still one of the most valuable companies in the world. Lots of people hate Apple products. Turns out Apple’s doing just fine – because the company appeals strongly to a motivated, highly engaged base.
There’s a popular saying in career and life coaching: “Find your people.” There’s a lot of truth to it. Look for those who are a natural fit for who you are and what you do – because those are the people who will help you be successful.
2. “Standard” metrics are sometimes wrong metrics.
It is said that the problem with autocracy is that it assumes that 1 man is smarter than 10,000 men, but that the problem with democracy is that it assumes that 10,000 men are smarter than 1 man.
Standard approaches are sometimes – even often – wrong. Michael Lewis’s Moneyball (a book I highly recommend) presents an excellent case study on this phenomenon, covering how the Oakland A’s – at the time, the team with the second-smallest payroll in all of Major League Baseball – kept consistently reaching the playoffs by eschewing standard approaches and instead relying on KPIs that were then nonstandard and much maligned.
(It turns out, for instance, that batting average was drastically overvalued, while walks and outs were drastically undervalued.)
The old guard of the baseball zeitgeist criticized and ridiculed A’s general manager Billy Beane. And that was fine – because his team kept winning games. And, eventually, his way of thinking caught on – at least to some extent.
In 2012, the Internet (we still capitalized the “I” back then) was still young enough that many people still didn’t entirely grasp the economic and scalability issues in Big Tech. The world still held Silicon Valley startups to the same standards as 100-year-old businesses – which made no sense.
The number of employees a company has is, in strict accounting terms, a liability – not an asset. But “big, valuable companies have lots of employees” was still the thinking of the time – despite the downsizing/”rightsizing” craze of the ‘90s.
Even today, in many areas, the world is full of irrelevant, barely relevant, and “vanity” metrics. For instance, companies base major marketing decisions on how many likes or they do get or will get on a social media post, or how many followers they have on a social account – without ever tying any of that to revenue (let alone ROI).
Understand what you’re doing – and be of a curious mind. If you do that, you’ll be able to easily enough figure out how much any given metric matters to your goals.
3. Build positioning, not piecemeal solutions.
It would have been easy for a company in Facebook’s position to approach their competitive landscape with questions like “Okay, how do we outdo Google+?” – and then get fixated on a game of “competitive” one-upsmanship that would have led nowhere.
Google+ was a red herring with good branding and bad platform strategy. The product was largely a Facebook ripoff from day one. Facebook didn’t need a “Hangouts” feature to be more like their imitator; if anything, the obvious imitation would have threatened Facebook’s brand – especially if there were any deficiencies in execution.
The real problem was that the market was moving toward visual media like photos and video – an area where Facebook lagged. This allowed any competitor with enough resources to threaten Facebook’s dominance – and empowered barely relevant bonehead companies like Yahoo to act as annoying spoilers.
Yes, Facebook was working on its own camera app, but (1) it paled in comparison to Instagram’s (by Zuckerberg’s own admission) and (2) it would not have been a sustainable solution to the long-term problem. Building “the best product,” if you can do it, is a fine thing – but only for so long as someone else doesn’t come along with an even better product.
This isn’t an advertisement for monopolies and oligopolies. This is an observation that strategic problems require long-term strategic solutions; that means positioning yourself such that you are ready to face as-of-yet unknown challenges.
It’s like chess. Checkmate is the ultimate goal, but you generally don’t start a chess game by trying to surround the opponent’s king. You start a chess game by working to position your pieces optimally for flexibility and control.
One foot in front of the other. Solutions are rarely instantaneous – but if you follow good processes and position yourself well, they will come.
4. Talk to people regularly, as much as you can; stay in touch.
Zuckerberg was only able to pull off this coup because he was regularly having conversations with Systrom. That’s how he was able to hear about Systrom’s soft offer from Twitter’s Costolo.
I call your attention to Law 18 in Robert Greene’s The 48 Laws of Power (another book I highly recommend): “Do not build fortresses to protect yourself; isolation is dangerous.”
Greene points to the reign of Louis XIV and the construction of Versailles. The palace was constructed to enable large gatherings and hamper privacy – even the king’s. Louis’s bedroom stood at both the literal and figurative center of the palace. Each morning began with palace residents filing into his room to greet him in a ritual known as the lever.
“The day was organized so that all the palace’s energy was directed at and passed through the king,” writes Greene. “[Versailles] served a crucial function: The king could keep an eye and an ear on everyone and everything around him.”
This allowed Louis to keep himself in the know on all palace ongoings (while also eliminating the threat of conspiracies against him).
It is tempting in the age of remote work to isolate oneself (especially for self-employed small operators, like much of B2BS’s readership). But business gets done by people in real time. The more you keep in touch with people in your orbit regularly, while pulling yet more people into your orbit, the more you keep yourself aware of important opportunities, obstacles, and threats.
Put another way: Have you ever wanted an “in” at a particular company, searched your LinkedIn connections for people who knew anyone there, and found that somebody you used to be “work friends” with but haven’t talked to in 12 years knows the company’s entire senior leadership?
Yeah. Avoid that.
Set regular calls with people, even in the absence of a true agenda. Call, text, DM, and email others regularly just to keep each other abreast of what you’re both up to. You never know what conversation you’ll wish you could have someday until the time comes.
5. Things are worth to you what they are worth to you.
Okay, so Zuckerberg knew he wanted to buy Instagram and got the opportunity to do so. Great. But a billion dollars? Was that necessary? Was it worth it?
Yes. Absolutely. As we’ve already covered. As anyone can plainly see. A billion dollars – even in 2012 dollars – is a drop in the bucket compared to the value it has brought to Meta née Facebook over the past 13 and a half years.
Things are worth to you what they are worth to you. And yeah, maybe you want to negotiate and haggle – but at the end of the day, don’t shy away from pursuing value for any price that’s worth it.
That also means taking into account subjective value – not merely objective value.
Most others would not have paid a billion dollars for Instagram 14 years ago. (Remember that its Series B valuation, from a few days prior, was half that amount.) And that doesn’t matter. It was worth a billion dollars to Mark Zuckerberg, so that’s why he offered that amount for it. End of story.
To frame this more broadly, I’m going to close this letter with a fable told to me a couple of years ago by Lauren Dewey – a marketing and revenue consultant who specializes in commercial real estate and nonprofits. (Lauren writes The Multifamily Performance Brief, a Substack I recommend for anyone who has even the tiniest bit of interest in multifamily and/or marketing.)
Here it is:
A man had an old watch. He was interested in selling it and wanted to see what he could get for it.
So he took it to a pawn shop.
The pawn shop owner briefly looked it over and said, “Eh. It’s scratched. I can’t make much from it. I’ll give you $20 for it.”
The man then took the watch to a jeweler.
The jeweler put on his loupe, examined it, and said, “Well, it’s pretty old and beat up, but the casing is gold. I’ll give you $200 for the melt value.”
The man then took the watch to a museum.
He showed it to the director of the museum, who quietly whisked him to a backroom, then brought in a few other people. They all examined the watch, then huddled privately, whispering.
The museum director then told the man that the watch was a priceless artifact made by a renowned craftsman – and that they’d be willing to offer several million dollars for it.
The value of the item didn’t change.
Only the person who assessed the value did.
Did this B2BS letter resonate? Do you remember when this happened? What were your thoughts at the time, and what are they now? Let me know in the comments or send me a message. (And share this with anyone else who might like to see it.) -JS