As taken from Barry Hughes ever excellent Game Theory Strategies ... a site you should know about
Facebook have announced their purchase of Instagram for a cool $1bn.
Why pay so much money for a company which is less than two years old, only has 13 staff and almost no revenue?
Network effects are when the benefit of a product to one user is greater when there are a lot of other people using the product. In other words, there is no point in joining Facebook when no-one else you know is on Facebook, but when everyone you know is on Facebook it is very difficult to stay away.
Facebook currently benefits from strong network effects that enable them to grow and keep their user base. If a rival can build a comparable network then people might quick move from Facebook. Facebook has to maintain its positive network effects at all costs.
If Mark Zuckerberg could have talked about network effects in his statement then it might have been very different. This is Mark Zuckerberg’s statement about the deal with my version of what he might have said inserted in italics:
“I’m excited to share the news that we’ve agreed to acquire Instagram and that their talented team will be joining Facebook.
(I’m excited to share the news that we’ve agreed to acquire Instagram and that we will control their rapidly growing user base. If we had let them grow then it might not have been long until people stopped sharing photos on Facebook and just used Instagram instead. If we let that happen then everything we’ve built since 2004 could have collapsed. We will be getting a few talented people along with the deal but that really isn’t that important)
For years, we’ve focused on building the best experience for sharing photos with your friends and family. Now, we’ll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests.
(For years, we’ve known that photos are one of the most important parts of a social network and although we’ve done a good job on people’s desktops we’ve been pretty bad at getting the mobile experience right. Instagram have done it very well and are a serious threat to the core of our business)
We believe these are different experiences that complement each other. But in order to do this well, we need to be mindful about keeping and building on Instagram’s strengths and features rather than just trying to integrate everything into Facebook.
(We believe these are different experiences that complement each other. We won’t just integrate everything into Facebook because our mobile experience isn’t good enough and if we do then someone else will come along and copy Instagram and we will still have the same problem of an upstart threatening our network)
That’s why we’re committed to building and growing Instagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.
(That’s why we’re committed to building and growing Instagram independently. Well, for the moment anyway. If we can use Instagram as a platform to improve our mobile offer then at some point we will join the two services together. Who knows, maybe in a couple of years Instagram will be nearly as big as Facebook and we will grow Instagram into a fully functioning mobile social network while Facebook starts to decline. As long as we’ve still got the biggest social network in the world it doesn’t really matter.)
We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience. We plan on keeping features like the ability to post to other social networks, the ability to not share your Instagrams on Facebook if you want, and the ability to have followers and follow people separately from your friends on Facebook.
(We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience. We know if we take that away we will really piss off the existing user base, they will transfer to another mobile photo sharing service which will connect with other services and we will have completely wasted our $1bn. Any changes we make will have to be done slowly)
These and many other features are important parts of the Instagram experience and we understand that. We will try to learn from Instagram’s experience to build similar features into our other products. At the same time, we will try to help Instagram continue to grow by using Facebook’s strong engineering team and infrastructure.
(These and many other features are important parts of the Instagram experience and we understand that. We will try to learn from Instagram’s experience to build similar features into our other products. Actually, we could always just have copied those features, we didn’t need to spend $1bn. As I said earlier it’s about the threat they pose to Facebook’s photo sharing network rather than features and infrastructure.)
This is an important milestone for Facebook because it’s the first time we’ve ever acquired a product and company with so many users. We don’t plan on doing many more of these, if any at all. But providing the best photo sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together.
(This is an important milestone for Facebook because it’s the first time we’ve ever had to acquire a product and company with so many users. Hopefully it won’t be very often that someone manages to grow so quickly and be a direct threat to such a key element of what we do. If they do then we will have to buy them too, but we’d rather not have to)
We’re looking forward to working with the Instagram team and to all of the great new experiences we’re going to be able to build together.
(Phew, I’m glad we got that threat under control just before our IPO!)
Network effects are a double-edged sword, very powerful when they are working in your favour and protecting your position, but they can destroy an established position very quickly once the network starts to crumble.
It seems that Facebook understand this very well.