Some parts of the Internet have been in an uproar about Instagram's roughly $1 billion sell-out to Facebook. The free iPhone and Android app allows over 30 million users to apply effects to their photos and share them with each other, not all of whom are happy with its new owners. Good Morning America's Joanna Stern, as well as AFP's Relax News, both summarize these reactions, in which at least one person compared Facebook to North Korea.
The reactions may be exaggerated, but no one outside the companies is sure yet what the purchase will mean. Because up until now, Instagram hasn't had any way of making money; its apps are free, and are not ad-supported. Facebook, meanwhile, makes its money off of ads, which are based on your personal info and the people you take pictures of.
It would be a mistake to say that Instagram has no business model, though, and that this is why it's inevitable that it would get bought. That's because if it was anything like other startups ...
Getting bought out was Instagram's business model
The people who started Instagram didn't make it as a public service, the way the Mozilla Foundation and GNOME Foundation write the free Firefox web browser and popular Linux desktop. Instagram started with a $500,000 seed investment from Baseline Ventures and Andreessen Horowitz, according to MG Siegler of TechCrunch, back when it was a "stealth project" called Burbn. It received another $57 million in funding over the next two years, with the most recent investment coming just days before the company was acquired by Facebook.
How Instagram was partly bought out already
That $50 million investment came at a $500 million valuation. Which means that the people who made it bought one-tenth of the company, before Facebook bought it back from them. In return, investors like them -- who also fund other Internet startups like Twitter -- expect a return on investment, whether it comes in the form of selling ads and a premium version or in the form of a buyout.
The former is a long-term strategy, like the one Twitter is taking, which involves increasingly intrusive ads and branding on a service that was once free and ad-free. The latter, the buyout option, is a way for investors and founders to cash in all at once, and to no longer have to worry about how to make money off of a free service.
Why this was inevitable
Until startups like Instagram begin doing either of those two things, they're living on borrowed time, giving away a free service by burning through money they're given. The more people use their service, and the more indispensable it is to them, the more valuable it becomes to the inevitable buyers or advertisers.
Jared Spurbeck is an open-source software enthusiast, who uses an Android phone and an Ubuntu laptop PC. He has been writing about technology and electronics since 2008.
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