September 11, 2012

Facebook's Fiasco and a White Knight in Instagram

Facebook's ace in the hole, Instagram, is just what the lumbering social giant needs to reinvigorate its popularity among a stale user base.

When Facebook founder Mark Zuckerberg struck the deal last April to acquire Instagram for $300 million in cash and just under 23 million shares, a transaction valued at an eye-popping $1 billion, it raised eyebrows. Snaring one of the fastest growing mobile apps in history, which amassed 80 million users in less than two years, was a slightly unexpected move, but now that the deal is done, Zuckerberg's acquisition looks like a real coup.

In the intervening five months since the CEO made his offer, the photo-sharing site has arguably fared better than Facebook. Instagram continued its blistering pace, picking up momentum and popularity and transforming into one of the hottest hangouts for tweens and teens, at a time when Facebook navigated a bumpy public offering, after which its stock declined. In fact, the $1 billion deal in April is worth just over 75 percent that today, or $736.5 million.

Facebook's largest acquisition, however, might just be its smartest. If you aren't sure why, just ask the nearest tween you come across. Why ask young people? Because while many over 21 think Instagram is just a site to post and share photographs, young teens and tweens have turned it into a bustling social network. While pictures are at its core, its ability to share and comment has fueled youthful throngs to join Instagram. Its surge in popularity may help it buoy its new owner, especially as the larger social network struggles to retain its edge.

What Happened: The two companies issued a joint statement last week pledging they would keep Instagram a separate entity and improve the app for the community, which has shared over 5 billion photos over the network so far.

"As we said from the beginning, we are committed to building and growing Instagram independently," Facebook's Mike Schroepfer wrote in the message. "Instagram will continue to serve its community, and we will help Instagram continue to grow by using Facebook's strong engineering team and infrastructure."

Facebook gains significantly from its acquisition, especially when it comes to mining the wealth of data on Instagram's huge user base for advertising purposes. The social network is also expected to incorporate powerful photo-sharing features in its own photo services, keeping it one step ahead of rivals like Pinterest and Google+ and gives it a much-needed mobile boost.

Also, in a less tangible but incredibly powerful way, the growing, young Instagram community provides Facebook with an opportunity for synergy -- trying out new ideas on the two social networks and sharing the benefits for both, allowing it to feed younger users into the more established Facebook, rather than competing against it.

For its part, the folks at Instagram promised the app and its features will stay the same, saying, "Instagram isn't going anywhere" -- which, of course is the point.

What Really Happened: The completed deal gives Facebook ownership of both the established social network and the young upstart, allowing it to evolve at the time it eliminates an outside competitor.

According to Nielsen data, users aged 50 to 64 made up nearly a quarter of Facebook's audience in March, and the only social network with a higher percentage of these older users was LinkedIn. Compare that to other Nielsen data, which revealed Instagram was the top photography site among teens aged 12 to 17, welcoming 1 million teens to the site in July, and it is easy to see how Instagram can revitalize Facebook. Instagram can serve as a stepping stone onto Facebook, especially as it matures as a social network and begins to attract an older (and less exclusive) audience.

These figures are bolstered by a Pew report from the summer which found 82 percent of 13-year-olds, a coveted demographic group, use social network sites and the most popular activity they enjoy is posting photos and videos, exactly the kind of thing Instagram supports.

Teens are fleeing Facebook in their perennial pursuit for private conversations, checking out new mobile apps, and exploring places like Instagram, Tumblr and Twitter to hook up with smaller circles of friends away from the prying eyes of Mom and Dad.

Many parents don't think twice about letting their tweens use Instagram, because they are either not fully aware of its social element or are assured is "safer" than other more-adult networks. Interestingly, iPod touch and tablets are credited with generating a wide swath of younger users, who may not have a smartphone yet but can use these devices to take and share photos.

Also, Instagram pictures can include hashtags in their descriptions, much like Twitter, which encourages teens to have fun as a group, jumping on trending topics such as the #ThatAwkwardMomentWhen. Accounts also provide for circles of friends, much like Google+ and Facebook.

Unlike traditional social networks, though, Instagram lets teens use aliases, like they can with e-mail accounts, rather than their real names, which gives them a greater sense of privacy. This appeals because they understand the public nature of social networks and the downside of it. Also, they realize that one wrong move on Facebook could hurt their chances of getting into college or landing a job.

In addition, the pseudonyms lets young people be more selective about who they share with, because not using their formal name removes some of the pressure to "friend" everyone in their school or circle of various friends. Rather than having one Facebook account with separate groups for people, they can have several Instagram accounts for different interests, like SuzySoccer and SuzyTrumpet, to mingle with their different circles more intimately.

Instagram users can choose to keep their accounts private, in which case photographs shared on the account would only be viewable by friends. While this won't prevent curious teens from searching and possibly finding inappropriate images, this feature and the aliases can keep ill-intentioned eyes away.

What's Next: There will be some push back over increasingly younger Instagram users, in light of the change in ownership and also from the sheer size of the numbers on Instagram.

Like Facebook, Instagram officially prohibits users under the age of 13, but like Facebook, kids are finding ways around this official policy. The account page only requires a correct birth year, and kids could even unknowingly bypass this restriction by signing in with the iTunes account on the device, which often belongs to an adult.

Parents who believed Instagram wasn't being used for social interaction may take a closer look and restrict their kids' usage.

Still, others will welcome Instagram as a "training wheels" of social media, finding its more intimate approach a compromise solution. They may even decide to join in on the fun, something that may already be happening, according to an Experian Hitwise survey that found Instagram increased its market share in the U.S. by more than 17,000 percent between July 2011 and July 2012.

The Takeaway: The deal is a win-win for Facebook, a company with a massive 900 million user base that is struggling to monetize its offerings and at the same time remain a vital player. Welcoming Instagram's sizeable and youthful community is a solid way to inject some much-needed vigor, and keeping it separate will fuel innovation, freeing both companies to try new things.

Facebook's growth in new U.S. users is slowing, and so far, foreign markets, where nearly 80 percent of Facebook users live, are less profitable. The company is still reeling from the aftershocks of its botched public offering, so the completion of the Instagram deal, and its attendant mobile success, could help reassure twitchy investors.

Like Instagram, Facebook isn't going anywhere soon, and there is little statistical evidence to show teens are completely abandoning the behemoth social network. Still, these users are fickle and their shifting preferences, which can make or break social networks, are often subtle at first.

The increase in sites like Instagram, Twitter and Tumblr aren't necessarily at the expense of Facebook, since Pew reports of the 80 percent of teens that use social networks, more than 93 percent of them have a Facebook account, not counting those under the official use age of 13.

Nevertheless, Facebook realizes how important novelty and mobility are as emerging social network forces, and it doesn't want to be caught napping when the social media tide turns -- something Instagram can help fend off, at least for now. ♦

Categories: In Brief