Facebook Bought Instagram for Good Reason (Think Amazon!)

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NEW YORK (TheStreet) -- Facebook bought Instagram in a deal worth about $1 billion. Shortly thereafter, it launched its own version of the service called Camera.

Wall Street and most of the financial media met the series of moves with blank stares. A blogger for Reuters whined: Someone please explain to me why this makes sense.

TheStreet's Chris Ciaccia labeled the situation uncertain, noting that Mark Zuckerberg will have to "answer questions" about this strategy or "face some very unhappy shareholders." Earlier in the same article, Ciaccia came close to figuring out why Facebook made the seemingly curious move: Perhaps CEO Mark Zuckerberg bought Instagram because of fears that users would navigate away from the site, hurting a core part of Facebook's business.

Close, but not quite.

Facebook is using a strategy popular in, ironically, one of the sleepiest and least aggressive industries in existence -- terrestrial radio. In fact, until Pandora came along and knocked radio executives out of their collective slumber, this might be the most competitive (or anti-competitive, depending on how you view these things) salvo radio companies ever tossed.

Imagine a major city with just one FM station targeting 18-to-34-year-old men with alternative music. It does well in the market, which suggests there might be room for another FM music station of the same, or similar, format that goes after the same demographic.

Instead of sitting around to wait for a competitor to flip the switch on the same type of station, the owner of the existing station changes format on another one of its properties, introducing a new station that goes after the same 18-to-34-year-old male audience. They use an alternative or rock format that is only slightly different from their other station. While the new entrant might take market share away from the old one, ratings and revenue stay within the same company instead of moving elsewhere.

Radio types would say the company that now has two stations of similar taste "blocked" competitors from making such a move. Introducing a third station that goes after the same group, particularly with the same type of format, risks oversaturating the market.

I'm surprised nobody -- at least that I know of -- has made this logical connection. It's probably because they've been too busy jumping on the now cosmopolitan bandwagon of Facebook hate.

By claiming Instagram and Camera as its own, Facebook might block another company from launching a competitive service. Even if somebody else does, Facebook will likely have secured a foothold in the area.

If a Facebook user leaves the site and heads over to Instagram, assuming it remains independent, the service still hangs under the Facebook umbrella.

Whatever revenue Instagram ends up producing, it's Facebook's. The company also acquires one of the fastest growing social media sites, flush with all types of talent.

Next Move

A billion-dollar investment today could end up paying for itself several times over. Not only does Facebook gain dominance in the photo-sharing space (I guess that's what we call it?), but the Instagram/Camera combo creates amazing synergies with present and future iterations of the site. Expect more acquisitions in a similar vein.

If I'm Facebook, my next move is quite clear -- I take out foursquare before somebody else does. Like Instagram (assuming this is the plan, and I think it should be), I run the dynamic "check-in" social network independently as well. Can you see where this is going?

Facebook is building an Amazon.com type of ecosystem. Call it a ubiquitous network. One that permeates multiple facets of your life and our collective culture. It's powerful. And, frankly, given the relative lack of competition in the social space, the connected platform Facebook builds out could end up, over the long haul, being more prolific than Amazon's. And this comes from an ardent AMZN bull.

Instagram powered by Facebook. foursquare powered by Facebook. That's the path to roll down. Observe where Facebook users go after using Facebook and make the destination part of the cult.

Folks who lack vision rip and ridicule Facebook's acquisition of Instagram. While he might not have a carbon copy of my idea in mind, Mark Zuckerberg is certainly thinking along similar lines. He changed the world from his freaking dorm room. He's not, all of a sudden, some dolt who just blew a billion bucks for no good reason.

Lure of Eyeballs

Call sites like Facebook, Instagram and foursquare time-wasters and fads all you want. That misses the point. The "boob tube" did a pretty good job of building out an impenetrable mega-billion dollar advertising juggernaut that has stood several tests of time. That's exactly what is happening in the social/mobile space. Companies like Facebook are building out dominant ecosystems just like Amazon did in retail/e-commerce.

To think that Facebook and Pandora cannot monetize mobile will go down as one of the biggest bonehead misses of our time. Advertisers always have and always will go where the people go. They have absolutely no reason not to. In fact, if they do not, they risk almost certain death.

Social media heavyweights such as Facebook, Instagram and foursquare are addictive and useful to their members and increasingly and incredibly valuable to advertisers.

Take a subway train into Midtown Manhattan. Fire up foursquare on your smartphone. After your meal, massage or bookstore visit, try to argue with a straight face that these social media stars a.) cannot monetize mobile and b.) are nothing more than unsustainable flashes in the pan.

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