$1 billion for an app — smart?

Opinion: April 16, 2012 at 12:00a.m.

Los Angeles Times: Facebook’s decision to pay $1 billion in stock and cash to buy Instagram, a company with one product and no revenue, inspired many people to consider a new career writing smartphone applications. Others wondered whether the purchase was just the latest sign of a new dot-com bubble, with the mania this time inspired by social technology and mobile apps. The truth is that the deal is more a reflection of the evolving economics of the Internet than a sign that valuations have lost all connection to reality.

Instagram is an app for iPhones and Android-based smartphones that lets people jazz up their photos (making them look like old Polaroids, for example) and share them with other Instagram users and websites. Launched a year and a half ago, it became the fastest-growing social network not named Facebook, attracting more than 30 million users, many of them young people habituated to documenting their lives through a smartphone’s camera lens.

Given that one of the main reasons people use Facebook is to share photos (by one estimate, 20 percent of the photos taken last year will eventually end up on the social network), it’s easy to see why Facebook Chief Executive Mark Zuckerberg would regard Instagram as a threat. Spending $1 billion to take out that competitor and absorb its superior technology makes a certain amount of sense for his company, which has an estimated market value 100 times as great.

Advertisers are increasingly following consumers to the apps and sites where they’re spending much of their time.

Instagram users devote hours to it every month, uploading 5 million photos daily. More important, they interact with the pictures shared, offering more than 650 comments or ratings per second. That kind of attention is what advertisers call a high level of engagement, and they’re eager to be part of it.

It’s an open question whether Instagram would have figured out how to monetize the app without driving off users, or whether Facebook will. But Instagram doesn’t look anything like Pets.com, even at $1 billion.