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Facebook's 'Gutsy' Instagram Deal Seen as Hedge Against Pinterest

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April 10, 2012 10:57AM

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"What Facebook needed was a hedge against Pinterest going into the IPO to assure a strong one," said analyst Rob Enderle. "Instagram on paper gives them that hedge -- underneath both [Pinterest and Instagram] are photo indexing sites, just going about it differently." Facebook bought startup Instagram for $1 billion.

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Facebook's record-setting deal to gobble up a tiny but fast-growing startup is jaw-dropping. But as the cliche about government spending goes: "A billion here, a billion there and pretty soon you're talking real money."

A billion dollars is the biggest payoff ever for a mobile application (a free one, no less), and will likely net co-founder and CEO Kevin Systrom -- only five years out of Stanford University -- a cool $400 million. The other co-founder, Mike Krieger, is expected to net around $100 million and much of the rest will go to making an unusually quick profit for investors.

Even for a company like Facebook that is likely to be valued at $100 billion in its initial public stock offering later this spring, the sum isn't exactly chump change, and won't yield any immediate return.

Eyes on the Prize

But although some may see it as a sign of potential binge splurging, most analysts see it as a smart investment that shows long-term vision and a determination to head off rivals before they get to the pass.

"One billion dollars to assure a $100 billion acquisition isn't a bad deal," technology consultant Rob Enderle of the Enderle Group told us hours after Facebook CEO Mark Zuckerberg announced the deal (via Facebook, of course).

Observers noted that fast-growing Instagram, downloaded by as many as 30 million users, was quickly becoming a Facebook competitor for photo-sharing. But Enderle believes that Zuckerberg and company were more worried about Pinterest.

The invitation-only online bulletin board for topics and photos has also grown exponentially, with an estimated 10 million registered users since its closed-beta launch in March 2010. It has also racked up some impressive metrics, with users spending an average of 98 minutes per month on Pinterest, according to comScore. It is seen as particularly appealing to women and to businesses.

"What Facebook needed was a hedge against Pinterest going into the IPO to assure a strong one," Enderle asserted. "Instagram on paper gives them that hedge -- underneath both [Pinterest and Instagram] are photo indexing sites, just going about it differently."

Buying Instagram, he said, "both assures Facebook can bring to market a Pinterest competitor in time for the IPO and defends that effort against IP litigation that would otherwise result."

Independence Is Key

It's a common practice for cash-flushed giants to buy out smaller competitors to either shut them down before they can become a threat or gain their customer base. But Enderle stressed that Facebook appears to be making a wise choice in keeping Instagram autonomous. Zuckerberg announced that he did not intend to integrate the company into the social network site -- a decision validated by widespread criticism of the deal by Instagram fans on Monday via Twitter.

The challenge ahead, however, will be assuring investors that the company won't be tossing billions around in the future to the point that it starts spending "real money."

"If the investors see this as out-of-control spending then it could actually become a larger problem than Pinterest is," Enderle said. "It's a gutsy move, but only one half -- the other half is assuring people view it positively."

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