Instagram Sells For $1 Billion, Despite No Revenue

The technology world is abuzz over Facebook's $1 billion deal to acquire the photo-sharing app Instagram. Two years ago Instagram didn't exist. Some reasons behind the company's meteoric rise: apps are everywhere and Instragram took advantage of the moment with a playful, easy-to-use service. Now Instagram's fans wonder whether its identity will be retained.

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Well, as long as your smartphone isn't stolen, you can snap a picture with it and share that picture using a program that is apparently very valuable: Instagram. Yesterday, Facebook agreed to buy the photo-sharing service for more than 1 billion dollars. It's a jaw-dropping price for a company that's less than two years old. Not only does Instagram have no profits, it has no revenue. That's right. It brings in no money at all.

So we asked NPR's Silicon Valley correspondent Steve Henn to explain the math.

STEVE HENN, BYLINE: Just as a point of comparison, The New York Times was founded in 1851. It employs thousands of people. And right now, it's valued less than this tiny startup Instagram. So why is Facebook willing to pay so much?

JOSH BERNOFF: The argument that they're doing is just to keep it out of the hands of Twitter, where it could be actually quite useful. That argument, to me, seems more plausible than any of the others that I've heard.

HENN: That's Josh Bernoff. He's a VP at Forrester Research and author of the book "Groundswell" about social media companies. Bernoff says investors are usually motivated by either greed or fear. And in this case, Facebook seems to have been afraid of Instagram's potential.

BERNOFF: That's frankly a better explanation than any other I can think of for a price this high. I mean, yeah, they got some talent, but that's a relatively small number of people for 1 billion dollars.

HENN: It's true that Instagram has fewer than two dozen employees, but it's growing incredibly fast. Last week, it released an app for Android phones. And in just a few days, it added more than 1 million new users.

Instagram allows users to take pictures with their phones and edit them in beautiful ways and share them with their friends. It's simple. Sara Clayton, a student at the University of Southern California, is worried Facebook may use the company to collect more data about her life. Still...

SARA CLAYTON: Instagram, for me, is too addicting to quit. Taking photos and putting them through black and white filters or sepia tone filters is really rejuvenating. And I don't think I'll be stopping for a while.

(SOUNDBITE OF LAUGHTER)

HENN: Still, many Instagram devotees - like Olivia Vincent, Justin Boyer, Chris Stanton and Caleb Brown - reacted to the news that it was selling out to Facebook yesterday with horror.

OLIVIA VINCENT: I love Instagram for showing pictures instead of ignorant misspelled statuses.

JUSTIN BOYER: I think people are a little fed up with Facebook.

CHRIS STANTON: Honestly, I just hope they don't make any changes to it because Instagram is a platform that is very simple and just almost perfect.

CALEB BROWN: I think Facebook buying Instagram is a terrible idea.

HENN: Millions of Instagram users love it. They're addicted to it. They share five million photos a day. So the first challenge facing Facebook will be not to mess that up. Then, it needs to help this little company continue to grow, and then develop into an actual business.

Instagram isn't the first little startup to be bought for an outrageous sum by an established Internet giant. YouTube was bought for $1.6 billion by Google six years ago. Still, many, if not most of these kinds of deals, fail. What's unusual this time is the buyer in this case, Facebook, hasn't even gone public yet.

BERNOFF: You rarely see a large acquisition, let alone a billion-dollar acquisition take place in a company that's in the run up to its IPO.

HENN: And because of that, Josh Bernoff at Forrester says he can't think of any other deal quite as audacious as this one.

BERNOFF: If you can go and make a billion-dollar acquisition and basically say to the shareholders and potential shareholders, hope you like this because this is the way we run thing. Well, this is a pretty good test of whether Marc Zuckerberg really can get away with anything he wants.

HENN: Josh Bernoff says a few years from now, it will be abundantly clear to those investors whether this was another brilliant business decision or Mark Zuckerberg's first big mistake. Steve Henn, NPR News, Silicon Valley.

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