How to Make $1 Billion in 18 Months

Ever wonder what big idea you could come up with to make it big?  Apparently the answer can include building a company that never makes a dime.  Just look at what happened with Instagram last week.   If you haven’t heard, Instagram is a free photo sharing application that allows users to take a photo, add filters, and share it either thru the app itself or thru other social networking services.  The product confines photos to a square shape, similar to Kodak Instamatic and Polaroid images, rather than the typical aspect ratio used by mobile device cameras.

Launched in October, 2010, Instagram was initially supported on iPhone, iPad, and iPod Touch and has been distributed through the iTunes app Store and Google Play. With approximately 14 employees, Instagram claimed to have 30 million users earlier this year.  And, with the recent roll out of supported Android camera phones the company said it was on track to have 100 million users by the end of the year.  However, on April 9, Facebook announced it would acquire Instagram for approximately $1 billion in cash and stock.

And here’s the kicker.  Instagram had zero revenue. Characterized in the press as a company having “lots of buzz but no business model”, they never made a penny. While photo sharing may have helped make Facebook the leader it is today, $1 billion for Instagram compared with the $35 million that Yahoo! paid for Flicker in 2007 is a pretty big leap by any measure.

Obviously Instagram investors are happy.  But what was in it for Facebook? Based on Facebook’s size today, their business model must be focused on adding revenue rather than simply adding users.  But in the online marketplace, dozens of companies have learned that monetizing online photo sharing can be a very elusive goal.  Current Instagram users worry that Facebook might have just seen it as a competitor and will just close it down, change it to put ads into their photo streams, or use it to compile more of their personal information.

To allay these fears, Facebook has announced that Instragram is here to stay and will remain available as a stand-alone app.  Only time will tell what happens further down the road, but the question is still out there – how will this purchase make money for Facebook?

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