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Episode 2: Instagram

Episode 2: Instagram

Sun, 01 Nov 2015 17:00

Ben and David discuss Facebook's acquisition of Instagram in 2012. Was it a success? If so, what are the criteria that made it work? What lessons can be learned for other acquisitions in the future?

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Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founder so we knew there's a natural fit we know the host of founders well David Senra hi David. Hey, Ben. Hey David. Thank you for joining us. Thank you for having me. I like how the group is together and then they say it's like the best curriculum for founders and executives. It really is we use your show for research a lot. I listened to your episode of the story of a few more. Rita before we did our Sony episodes is incredible primer. You know, he's actually a good example of why people listen to founders into acquired because all of history's greatest entrepreneurs investors they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence Steve jobs talked about him over and over again if you do the research him. But I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired we focus on company histories. You tell the histories of the individual people you're the people version of acquired and where the company version of founders listeners. The other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin land from a biography that David did David. It was the third fourth time you've done Polaroid. I've read five biographies of Edwin land and I think I've made eight episodes of them because in my opinion, the greatest entrepreneur to ever do it. My favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs. He's talking about Edwin lands my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die, but the ideas never do. And so Edwin land had passed away way before the apex of Apple, but Steve was still able to use those ideas and now he's gone and we can use this ideas. And so I think what acquires doing what founder trying to do as well is find the best ideas in history and push them down the generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders go check it out. Welcome back to episode two of acquired. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts yet again. At least for the second time and hopefully many, many more. Hopefully many more. Thank you to all of our listeners. All few of you for the amazing few bit growing small and number strong and spirit. Thank you for the amazing feedback. It was incredible. We learned a lot. We learned that Ben has amazing idioms amazing names David has dulcet tones. Thank you for the feedback. We will try to incorporate it and hope that we keep getting better if you have more feedback after this one. Please send it to us. You can find us on you can find the show on Twitter at ad acquired FM. You can find Ben at Gilbert. You can find me David at DJ Rosent DJ R O S E N T. And our website is live at So we introduce ourselves again. We think for the first couple so people so you know more than our original five listeners get the low down. I think we can do it this just this once then once we're viral after episode three. Then we can stop introducing ourselves. Sounds are so I'm Ben Gilbert. I am the co founder of Pioneer Square Labs in here in Seattle. We come up with ideas for companies. We prototype them. We build them. We try and get customers and if it seems to be working then we recruit really talented people to come in and take the company from us and we go start the next thing. And I'm David. I am a principal at Madridron Adventure Group. We are an early stage venture capital firm located here in Seattle. Invest in seed series A series B stage technology companies always looking for the next great thing which might become the next great acquireer or maybe a query. And so podcast. All right so with that let's segue into our second episode. Our first was Disney acquiring Pixar. And here for our second as another landmark successful you know even even in the very recent last couple of years this one's not nearly as old landmark successful acquisition Instagram by Facebook. So as a quick reminder the framework that we've decided on for our show is we're going to briefly talk about the acquisition kind of facts and history. Then each of us Ben and I are going to categorize the acquisition into a few buckets that we've identified. And then we're going to do a fun segment called what would have happened had the acquisition not happened trust us it's fun. And then we're adding a new one for this episode which is is tech themes that we think are illustrated in by this acquisition. And then and then finally we're going to give the the deal as a whole agreed. And we heard the feedback that Ben and I agree too much so we're going to try and be more controversial here I'm not though. Yes you are. All right Instagram so I remember vividly this was one of those moments in my technology life at least exactly where I was the day I found out that Facebook bought Instagram for a billion dollars. And today sitting here in 2015 where there are like 623 unicorn startups out there that is valued at you know more than a billion dollars back in April 2012 they were very very few. And the even idea that a company that had 13 employees and no revenue and made an app on your phone could be worth a billion dollars was pretty shocking at the time and totally shocking because there was no you know discussion of it being worth a billion dollars pre acquisition. The only indicator that that that number was ever talked about was when the deal was done and announced to the public. Yep and and interestingly Instagram raised its I believe series B round of venture capital just like a week or even less than a week before the acquisition happened and did value it at several several hundred million dollars. But all that only came out just right before even during and after the acquisition news which was pretty momentous really ushered in bed and I've been talking about this for this this acquisition for months it was part of the genesis of the idea of the show this acquisition I think really ushered in you know quote and quote the age of the unicorn. Yeah much as I hate the term sure to see that why seem that way so quick facts April 2012 Facebook announces that they are buying Instagram company with 13 employees no revenue no obvious monetization model and had 30 million users at the time and interestingly. Yeah just a week before Instagram had launched their Android app and added one million users at that time with 13 employees and 30 million users Instagram had 2.3 million users per employee at acquisition pop quiz how many users per employee do you think Instagram has today. We're really tired a whole bunch of people right. I think we'll be talking about earlier they have like 150 employees now about 150 employees as best as we can tell. I don't know that that number is going to be significantly worse now it's better 2.6 million users per employee Instagram now has 2.5 years later 400 million users. Wow. Huh okay so I don't know I feel like I'm already hinting at my my answer to the question later of my rendered conclusion but you know we this is our second episode we're still going to the easy ones here. Pretty incredible honestly I think the thing that always amazed me about Instagram was it's so simple they focus their eyes on the prize and the question is like you know what we'll get to this a little bit later but what would have happened to that incredible simple sheltered platform if it wasn't integrated into the Facebook strategy and they were forced to start clawing and scratching for for more of that attention that that keeps people tied to Facebook. I think the interesting thing that Facebook realized is there are the they're the social fabric they're necessary and it was getting to the point you know everyone's parents were on Facebook it became more of a utility in our lives then then sort of an escape or an enjoyable thing and actually quick aside it's it's crazy I was scrolling back through my my history of writing on a friend's wall as a freshman year college and our conversation back and forth on our each other's like public Facebook walls look like text messages and they're they're talking about what grades we got in classes and like sort of private stuff that I wouldn't be posting today it's really fascinating that you know Facebook was was very much that that sort of fun place at that point and not just this thing that we viewed as kind of necessary and a thing that it could be assumed that pretty much every person would have and you know you see there's a lot of reports of hey kids aren't using Facebook they're just using Instagram they're just using snapchat they're all using Facebook too but it's for school work I mean it's for the necessary less fun things in their lives and you know starting with with Instagram and with other actually acquisitions later I mean Instagram is is sort of where you want to hang out and Facebook is where you have to go yeah and you know Facebook it's so easy to forget now sitting here in 2015 and maybe we'll maybe if we're looking for something funny in 2018 we'll go back and listen to our podcast that we're recording now but but it's even so hard to remember like this was only three and a half years ago when this acquisition happened and Facebook was in such a different place from where it is today the company had just recently gone public we've been and I were just talking about this right before the episode they were still in the whole HTML 5 mobile app hell their apps were buggy can you remember that was even a debate oh nightmare and right and like you know now like what is like half of Facebook's revenue if not more we haven't we shouldn't make a note too that we haven't fact checked most of our numbers so we could be wrong here but at least it seems like everything that people talk about with Facebook is their mobile app installs and their CPI ads like we could even do that with HTML 5 remember back you know people talk about now you know and I think you know Mark Zuckerberg has even said you know that Facebook really made a huge misstep in mobile and apps like Instagram like WhatsApp that they would later acquire like messenger that they would build within Facebook in the coming years really stepped in and became took over a lot of the value that people were getting out of Facebook from back in the day the fun and it's amazing because Facebook you know really really killed it on the desktop there's a lot of different boxes everywhere if you remember there was the mini feed and then there was the wall and then there was apps that you could have installed super poke each one super poke God doing this super poke it there there's these boxes there's sort of floating around all over the place maximizing your screen real estate and when they try to translate that to a mobile experience you know it's it's tough to pair down all that stuff when your app has all incredible functionality whereas you have Instagram which is born in the mobile era and I can have a funny story about this is born in the mobile era and has these immersive beautiful damn near full screen photographs and all of my attention is on that one thing at one time and it was focused on making anybody able to look like a talented creative even if we were I mean I specifically remember one of my early Instagrams was of like the torn up bottom my jeans and my shoe and it looks so artsy with a filter and I couldn't I it was a place where you could show off that's so you know full screen and and really like you know what they what they did was understand what people's attention span and what people's intention looked like when they were on that platform and I remember this is not a thing that I came close to understanding at the time because I am I remember I used to work at a dog patch labs at pure 38 may at rest in pieces recently been demolished when you're interning a code to eat at code to eat yeah in San Francisco and self in acquisition yeah yeah acquisition and then another acquisition yeah everything gets everything becomes sales force eventually in the enterprise yeah anyway so I'm a pure 38 and the guys from bourbon later Instagram were upstairs working on a pivot from their kind of location based thing to this very simple filter focused upload your photos to a social network app and I remember seeing a demo of it when I walked by one time and telling Kevin I'm pretty sure Facebook already lets you upload photos from your phone and everybody's already on that and that then is why you're not a venture capitalist out we'll leave that to David but no I think you know then what you're saying I think really illustrates you know we're going to talk about themes you know as part of our programming in a minute but I think is really illustrates something critical about why Facebook needed Instagram and that was engagement you know Facebook before mobile member you know back when it first launched when I was in college and you were probably in high school at first launch right yep you know how much engagement did you have with Facebook it was you know it's related to this concept of fun right and now Facebook has become this utility and I barely engage with it at all but Instagram and messaging what's app and other services like that have become on mobile these atomized services where your engagement lies and that's the core of driving advertising revenue and Facebook has always been really good at this strategy where social networking is a cool kids game I mean there's the cool kids go to a thing and then the late adopters come on and then parents come on and that it's boring and that it's built for the old world platform and then at atrophys and it dies and what Facebook did when in acquiring Instagram is is you know set their hubris aside and say we're not the most important platform the most important thing is our business staying alive and what we have to do is bet on whatever the thing where the people are on the new platform is and you know after they after that critical first step then they can start learning about what makes that so successful and kind of integrate all of those really talented folks to kind of like teach Facebook how to do that too. So that brings us to section number two of our show what category would you put this acquisition in people technology product business line other is fine I was just talking about people but that's that's totally second order here I'm going to say this is product. The Facebook left it alone in Facebook did the thing that every other acquire can't seem to resist in any scenario and that is saying oh you know what this could do this can make our our main product better and the reason that that product was was dangerous to you and potentially kick in your ass was because they figured something out you didn't and it's been really incredible to watch Instagram have its own evolution and you know I'll be out with some little boosts and from you know the Facebook news feed and and that is very important. News feed and things like that doing some algorithmic priority but it's it's really remained separate separate team and stayed very true to the court of what they set out to do. I think everything you said is right and totally the natural category to put this in his products but I'm going to be a little bit controversial I'm actually going to say technology here and the reason I'm going to say technology is not because of. Any specific great computer science based innovation that Instagram team had but I'm going to say that this became as I was talking about really the first the first piece of of Facebook's entire strategy for the mobile technology wave that they missed that they missed from from the beginning and. You think that they sorry this is you think that they wouldn't have gotten their act together in making their app what it is today without I mean let's let's look at whether app is today it's a collection of the most talented iOS developers in the world and a lot of the best mobile designers in the world packed into one office developing maybe arguably the best suite of apps in the world. You just said the critical thing sweet of apps what is Facebook today Facebook is a sweet of company. Not going to screw with you. I think without Instagram without and it's impossible to know how much of this is Zuckerberg and Charles Samberg and the rest of the Facebook team court Facebook team strategy versus what's come from from Kevin and Mike and the rest of the Instagram team. But I think without that acquisition happening I think Facebook probably doesn't or make an offer for Snapchat somewhat a few months or a short time after to buy Snapchat for three billion that Snapchat rejected. I think Facebook doesn't buy WhatsApp for the incredible amount of money that it did and maybe you know maybe even Oculus to a certain extent but even more than that you know again think back to April 2012 when Facebook on mobile is this HTML 5 mess and think about messenger now to go from that HTML 5 mess to the Facebook court. Facebook core Facebook app today which drives a huge amount of revenue for through their paid install program ad program and then to develop messenger on the side and then have the guts to rip it out and make it part of this suite of apps strategy you know face messenger I believe the latest numbers has 700 million. Active users which is pretty incredible for something that is now fully stand alone app. Yeah so I'll go with you on the technology of Instagram being a kick in the pants but I don't think you know we talk about like what a technology acquisition that is truly about you know they you know they understood how to do this computationally difficult thing better than we did and we needed. To enhance our core product or you know Apple acquiring the touch ID company because they could make a differentiated product based on integrating that technology I think that's a far second order thing here to acquiring the product of Instagram. You might be right. You'll give me later I'll get you later all right what would have happened if Kevin system had said no. Yeah Instagram just raised 50 million dollars they have plenty of runway. Break future ahead of them where would we be today. Yeah you know I think Instagram as a product to users wouldn't be significantly different. I think that it would have continued to grow more slowly because they didn't have the resources they wouldn't have had the prioritization from and you know this is this is theoretical this is something we talked about before did you know Facebook really prioritize Instagram post in the news feed algorithm. Probably I mean it's really looked like it it looks like we had a huge spike in that there is probably a lot more Instagram traffic on the other hand one of the things I'm still bummed about today as Twitter a loyal Twitter user. Oh man how great was it when Instagram was natively integrated into the Twitter stream. Yeah that was pretty cool and that was that was a sad sad day when that integration broke. Totally sad. And actually it changed my behavior like I don't tweet photos on like I don't put a photo on Instagram and then tweet it because I know it's not going to show up. I natively uploaded to Twitter now. Yep and how often do you do that? Every third fourth tweet that's maybe yeah maybe. But but but I'll say I was going to say all these things negate each other. Twitter is at 300 million users and turning out everyone they can bring in turned out a billion plus so far and Facebook sit in pretty with you know a decent chunk of the world's internet enabled population. So I think anything Facebook does is you know a three four X maybe five X force multiplier on top of anything Twitter could do no doubt however I do think Instagram has become itself a huge driver of audience and 400 million active users added a hundred million this year. It's crazy. But I think they you know I think you can make an argument that they could have continued bootstrapping their way up into that user base through other platforms like Twitter. And using Facebook as well. Yeah I mean here's here's how I think it would be different I think you know in the last six months especially Twitter has a I'm sorry Instagram has a very real ad platform. And that they they took their time in developing it first a very full serve one read or directly with the Instagram team now a self served dashboard. But you get these really immersive brand ads that are platform appropriate they don't feel like something that I wanted school past I want to look at it almost as much as I want to look at the gorgeous nature photography that I see. They just didn't have the funnel of advertisers to point the ad platform at so it would have been very slow to try and get advertiser attention and people to come over and use the Instagram platform and not only to spend their dollars there but to spend their attention they're learning a new platform whereas in the Facebook acquisition. They have this kind of dual dual deployment where you can buy ads on either from a single ad dashboard much like Google did very early on with YouTube. So I'm going to go a little bit kind of out there crazy direction with this is pure speculation but I think if this acquisition hadn't happened you know I mean like we were like I was talking about earlier this kicked off the era of the constellation of apps you know with Facebook and with you know Twitter buying vine. And you got even Instagram itself now between boomerang that they just launched and hyper lapse and layout yep which kudos to the Instagram design team the the cohesiveness of those is really nice so let's imagine though for a second that this constellation of apps thing hasn't become a theme in the technology landscape over the past couple years. It's really interesting well it's really interesting because it has you now have all of these major social platforms that have been created over the past five years with the exception of snapchat all of the US new domestic US based social platforms are owned by other companies with other business models and other goals. And if you think about the level of business model innovation that's happened at this mobile app layer in the US and compare it to Asia and WhatsApp now it's pretty bold claim to say the acquisition of Instagram prevented the rise of what's app like business models in the US. But let's just play this out for a minute or sorry not what's a we chat. I met we chat yeah as a quick aside for listeners if you haven't been reading up on we chat it is insane I mean it's absolutely insane it's on the surface a messaging app but it's effectively like an operating system where it's much easier for especially non technical folks to to build a plugin for their business to we chat that enables all sorts of things from book. Doctors appointments to pick your kids up at school all within this. Theoretical we chat is in my opinion we chat is nothing short of literally the creation of an entirely new major major business model for technology companies and that is the value added services and integrations business model. Before we chat this is I mean it's amazing this product is given away for free not monetize through advertising and still in China which is a brutally competitive market where it is very hard to monetize users this product has I believe the latest estimates are like a $7 arpeo annual revenue per user in China. I think more than Twitter and rivaling Facebook and those are ad platforms exactly and that is pretty incredible and what and so what I think is amazing is because in the US you've had these new innovative mobile products be acquired by larger companies with older established business models you haven't seen that happened in the US as much now there are lots of other factors you know like in China there was no. You know mobile was really the first computing platform to be widely adopted across the whole population there was no legacy desktop product and technology layer like there was in the US that certainly a lot to do with it too. But imagine you know what type of business model innovation we might have seen at Instagram remain independent I don't know. And certainly snapchat is playing with it too. In terms of constellation of apps in terms of business models yeah yeah yeah they're their channels thing will be really interesting to watch play out. And new new we'll move quickly here but new segment for the show for episode two we've already talked about the little theme music for yeah new segment new segment what we've talked about this a bunch already but you know for for you been what kind of broad themes and technology does the Facebook Instagram acquisition kind of represent for you. Yeah so I was thinking about this when when you sent me earlier your idea to do the new segment and it's trying to think. You know I think you did a really nice job in the last segment kind of bringing in the app the app constellation theme I think the other theme that this sort of opens up is that you really have to own the audience and that sounds trivial and obvious at first but I think what I mean by that. In any distribution channel you have suppliers you have distribution and then you have the audience and with the rise of these services it's becoming increasingly more important to own the default channel that the users go to for leisure for distraction for whatever it is because in the you know near infinite nature of the internet you can push whatever you want through the internet. You can push whatever you want through that channel to reach that audience and I think Facebook's core asset was and still sort of is being that core place where people want to go and want to the you know the first thing you want to do when you open your phone when you have some downtime or whatever it is you go there to be distracted you go there for fun you go there to see your friends to see whatever you aspire to. And that owning the channel makes you the most powerful advertising platform in the world and on top of that makes you the most powerful a lot of other things in the world I mean we're we're seeing it now with Facebook instant articles and other experiments that we're playing with but you can you are a very very powerful force in your business model and to other people's business models if you are the first step in dishing out who gets the attention after you. Facebook saw that as an incredible dangerous threat of people want to look at Instagram instead of us and then they can start shoving whatever they want in that feed even though that's kind of Instagram's model is to not clutter it up they've managed to do a really nice job of taking that attention that they're getting as the front door of what you want to go look at and putting that where where advertisers are appropriately putting their. Yeah it's a you know it's I think this is one of the reasons why technology companies with advertising business models have become so much larger in terms of size and reach and revenue and value then old world advertising models you know I started my career steeped in old world media and advertising you know I worked in in media technology and media and. Investment banking and I worked at a newspaper at the Wall Street Journal and but but I worked with in when I was in banking I worked on television and cable networks a lot and and their content and distribution were separate you know the distribution companies were the cable companies in the satellite companies and they owned the distribution pipe and the content companies were the cable networks the AMC's the scripts you know the all the channels that you see on cable TV and those were two separate things. And they both had their own advertising kind of they shared the advertising pie those two those two stages of the value chain and and and although television advertising was and perhaps still might be larger than web digital based advertising as a whole no one company could become as big as a as a Google or as a Facebook has. Because Google and Facebook have or at least Facebook has integrated and and through Instagram integrated content and distribution within one single company within one single app or constellation of apps. Yeah they are the channel in Facebook is the channel for where you go when you want social or downtime or you know the variety of other services that Facebook offers events investing all that. Yeah Google is is where you go when you have intent. So for me I think you know we've talked about a few things throughout the episode you know we mentioned briefly technology waves which is something that Ben and I talk a lot about this concept. We should do a special episode on on waves but you know the concept that in the tech world there are these waves of technology that come every few years and I think this is a perfect illustration of the wave of mobile coming in and watching over the desktop wave but bringing with it a whole new. A whole new set of companies of content and product models of business models that may or may not have been implemented in the at least domestically but that's one and then and then the other one that you know I think is something I've been thinking about a lot lately in terms of technology themes. I think is the the scale ability and the leverage that technology gives you and I'm thinking in particular about the number of employees at Instagram I mean this is just incredible 13 employees with 30 million users. Oh oh and on those 13 employees we were looking on a LinkedIn to I think 11 are still at it. It's crazy like that you know which is not typical for no it's that's yet yet another example of Facebook doing a great job here. But 13 employees at this landmark acquisition and today even a roughly 150 for 400 million users and it's impossible to know how much revenue Instagram is generating today but there was a great equity researcher report put out by city group a year ago almost a year ago and which they valued Instagram at $35 billion and this was when Instagram had not quite 300 million users. What's Facebook's market cap. I don't know offhand I want to say it's right around 200 billion. Yeah so I mean that's what a ridiculous chunk required for a billion dollars. It was less back then. Right right. And in that report they estimate that Instagram revenues are could be on the order of about $2 billion. That's incredible. This year right is it 20 I think is maybe summer 2015 to 2016 or something like that. This year they estimate last year city group estimated $2 billion in revenue for Instagram this year in 2015. To do that with 150 employees is incredible. And then what's that which came later something like 50 some out employees required for 20 plus billion dollars. I'll raise the flag here and say not really fair to do the revenue calculation for the ad network since they're piggybacking off of Facebook's ad network and I'm sure that takes a lot of engineers. True true true but I think about the leverage that is possible with technology and technology companies versus again old world media where where I spent time earlier in my career. I mean nowhere near that kind of leverage that you can get. All right let's wrap up conclusion time conclusion time. So acquired for billion dollars December of last year you know externally valued at 35 billion even ignoring the fact that that's based on you know there's two billion dollars in revenues this year this is like not grasping at straws this is a very real revenue product and in fact when it was acquired I don't think it had revenue they had no ad platform they had no nothing. Pretty incredible what they've done since acquired 35 X multiple post acquisition on that property alone not to mention all the ancillary benefits of potentially steering Facebook as a whole organization in the right direction on mobile. I mean do I get a plus it's an a plus I was I know we need more disagreement on this show but man a plus for me to this might this might even be the very from a from a. From a return standpoint even to street financial returns this might be the very best acquisition in technology history I'm curious is there ever what is how small of a scale do you have to go down to to get something that was a 35 X multiple in three is it three years I mean bungee perhaps for shadow in that'll be an interesting episode by the way listeners if you have requests suggestions comments thoughts as we said but if you can think of companies we haven't that we haven't please send our way we'd also love to have some guests on the show and by it's under our way there's Twitter there's also a little feedback form on our site where you can submit stuff we'd also love to have guests if you have particular insight into a great technology acquisition in history that either you know you were part of it directly or you worked on it as part of a third party and you want to be on our show shoot us a new. I think we're about done alright thanks everyone we'll see you next time.