You have heard by now that on April 9th, 2012, Facebook announced the acquisition of Instagram. For a billion dollars, no less. This has come as a shock not only to app developers around the world, but also to the employees at Instagram!

The Facebook CEO Mark Z has pledged to allow Instagram to remain independent. Of course they may eventually tie it in very closely with FB, but for now, they will remain independent. If FB wants to leave Instagram be, why did they pay a billion dollars for it? Why not just give them the funding they were looking for? They could have still controlled what was going on at Instagram – and if they only wanted it to be independent, it was way cheaper to do that.

Was it to acquire new customers? Not really. All Instagram users are already FB users. Both on the iPhone and on the Android. How does this compare with previous acquisitions of larger companies?

When IBM acquired Crossworlds in late 2001, IBM paid $200 million for a company with more than a thousand paying enterprise customers. Crossworlds had about 300 employees. In comparison, Instagram has a mere 13 employees and no web application. Just a simple iPhone app that applies filters on photos. And now an Android app. Both these apps are free to download and is not generating any money for the company via ads or anything else.

So was it worth at billion bucks. I guess not. So why did FB get desperate? Here’s my take. Last week when Instagram finally released the android app, a million users downloaded it. And since they had a new app, they tried it out. They posted more pictures on that day than they did FB, just because of the novelty. That must have caused a stir at FB.

If you can’t beat them, join them. Or in this case, buy them and be them.

Update

What FB should have done is hire a few iPhone app developers and ask them to build the software in a month or two. It is not rocket science to build an iPhone app. I know because I have built a few myself. It would have cost way less than a hundred thousand dollars to replicate Instagram. What FB did is very irresponsible. Although human memory is short, I imagine that good sense will prevail and people will liken this to the dot com bubble of a decade ago. Hopefully, once FB goes public, they will not be able to be irresponsible like this. But if they continue to be irresponsible, they will pay the price. In any case, I think this is the first step major error in the direction of diluting the value of FB.