Instabux – What’s Really Going On Here?

As Facebook’s acquisition of Instagram (clever URL, that) has been all over every media outlet on this planet, and as it’s been positioned by many as a “mobile play”, I suppose I should say something about this deal. First of all, traditional metrics regarding valuation have been obsolete for some time. And, thanks to inflation, a billion dollars isn’t all that much money anymore. And, finally, today it’s all about opportunity cost in an era of social media, making this a very good (and cheap) deal all around. Long term, though, such is unlikely to become the norm.

Let me explain. Since the original monetization of Web search (as personified by Google, of course, but they weren’t the only one who made big bucks during that era), it’s been all about eyeballs. Specifically, how to attract and retain eyeballs so as to sell these eyeballs to someone else. This is no different from the business model of broadcast television; grab them with promises of exciting programming, and maybe they’ll stay for the commercials. The problem with television is that it’s a serial medium, and there’s no easy way to tell exactly which eyeballs are being attracted in real time.

The Web changed all of that, of course, enabling much closer binding of eyeballs to advertisers. But you and I regardless remain the product, not the customer. Traditional broadcast television, I have argued, is on the way out. There is no longer any good need to bind a given user to a particular place and time just to consume media anymore; we live in a random-access, anytime/anywhere world enabled by fundamental advances in technology. Still, advertising is still at present required to pay the bills, and once the shift to full on-demand and subscription-based access to programming and media is complete (a few years left to go on that one, of course, but think Netflix, Amazon video, Hulu, etc.), the broadcasters will die and all that cable bandwidth and broadcast spectrum will be devoted to broadband. A win/win, if you ask me.

And the best way to attract eyeballs in this post-broadcast brave new world? No, not compelling programming, but rather community. There are tons of people addicted to Facebook, Twitter, and even Instagram, meaning that anyone owning these channels can make the aforementioned big bucks selling their users to advertisers. And that’s exactly what happened with this deal – Facebook gets more eyeballs, a compelling platform (which, to be fair, really isn’t all that different from Pinterest and assorted others), and keeps same out of the hands of competitors. Crafty venture capitalists had driven the price of Instagram up to half a billion dollars with just this hope in mind; Facebook acted quickly because it’s got a ton of bucks available and the opportunity cost of not doing the deal was potentially much higher (see the Forbes article for why this is so, but at about US$33 per pair of eyeballs, you do the math). Simple. And, for Instagram, a company with a business plan of apparently exactly what happened, congratulations. Capitalism at its finest.

But the pushback has begun. Instgram’s capabilities are fairly limited; the barriers to entry in this space are low (again, think Pinterest, and what Google and a rejuvenated Yahoo, and others, might do here – it’s just not that hard, technically or otherwise). Many Instagram users are concerned about Facebook’s clearly-overreaching privacy policy and potential changes to the service. All in all, this is a great deal for Facebook, at least in the short run. After that – who knows? It’s my personal belief that the advertising model will reach its limits in the not-too-distant future, but more on that later.