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Facebook Buys Instagram: A Snapshot of an Alternative Reality?

Did Facebook pay too much for Instagram? Here's one answer.
COLLABORATORS Adam Hartung
Instagram cost per customer for Facebook
infographic by Catalogtree

“On a cost-per-existing-customer basis, Facebook stole Instagram. And that’s before Facebook spreads the solution to the rest of its 780 million users! Forget how many employees Instagram has, or its historical revenues or its assets. Or lack of historical revenue. In an innovation economy, if you have a product that 35 million people hear about and start using in less than a year, you have something extremely valuable!”

So notes Adam Hartung on Forbes.com, which got us thinking about the cost-per-existing-customer metric. Based on Instagram’s 35 million customers, Facebook’s $1 billion purchase price works out to $28.57 per customer, or about a tenth of what some studies have shown the business-to-business average to be.

Meanwhile, if you count Facebook’s 780 million users as new customers of Instagram, that works out to be a mere $1.34 per potential customer for Facebook users joining Instagram. And that’s discounting existing customers of Instagram, on the generous assumption that they already use Facebook. (Since Hartung’s post, Facebook’s ranks have swelled, making the numbers even more favorable for Instagram.) Great economies of scale, for sure.

The closing line on Instagram’s homepage (“Oh yeah, did we mention it’s free?”) should give some solace to B2B firms who spend hundreds of dollars to acquire a new paying customer.

Deep down, when you think about social media, you think:

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THE PLUS

Many people have questioned whether the Facebook-Instagram deal is proof of a new dot-com bubble. But Andy Baio, who writes for Wired.com and Waxy.org, says those fears are overblown.

When Baio crunched the numbers on 32 notable dot-com acquisitions between 1999 and 2012, he found that, on a cost-per-customer basis, Facebook’s deal with Instagram looks dirt cheap compared with Google’s 2006 acquisition of YouTube ($49 per user), Amazon’s 2009 acquisition of Zappos ($206 per user) and—at the height of the original dot-com boom—Yahoo’s $5.7 billion acquisition of Broadcast.com (a whopping $10,962 per user).

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