Facebook turns umbrella company via Instagram purchase

Facebook Inc.'s acquisition strategy has long been to buy a start-up, shut it down and keep the talent. But it's going to need a new playbook for its biggest deal yet. Mark Zuckerberg, Facebook’s 28-year old founder and chief, has found himself in a rare and enviable position. Now that his social network has been valued at $100bn, he can comfortably afford to wipe out any of its competitors with large purchase prices and lots of change to spare. 

Facebook will need to figure out how to meld Instagram into its social network to boost its position on mobile phones, while being careful not to trample on the app's clear purpose and simplicity that has attracted about 35 million users.

It also risks alienating Instagram users who are worried about Facebook's spotty track record with users' privacy. Many members took to Facebook and Twitter to voice their concerns after news of the deal was announced.

Big technology companies have a mixed record of pulling off this sort of balancing act. EBay Inc.'s EBAY +0.82% acquisition of online payments service PayPal in 2002 paid off handsomely, and the video site YouTube has flourished under Google Inc. GOOG +1.45%

But there are plenty of cautionary tales of promising online companies that lost their momentum once brought under a larger corporate umbrella, including News Corp's NWSA +0.99% acquisition of MySpace. News Corp. owns The Wall Street Journal.

Mr. Zuckerberg said in a blog post that his company is "committed to building and growing Instagram independently." At the same time, he said, the company would work with Instagram and try to incorporate some of its thinking into the Facebook products.

"When you're a bigger company, it requires more people to get things approved, more competing resources," said Geoff Yang, a partner at the Silicon Valley-based venture capital firm Redpoint Ventures and an investor in MySpace. "Generally, when you're in a bigger company, the speed of execution and focus goes down."

Instagram users share those concerns. "I joined Instagram because in many ways it was the anti-Facebook,"said Aminatou Sow, a 27-year-old digital strategist in Washington, DC. "I only had intentions of documenting my life through pictures and not to connect with another social network."The Instagram deal came together in record time: A call late last week from Mr. Zuckerberg to Instagram Chief Executive Kevin Systrom led to a weekend powwow at Mr. Zuckerberg's Palo Alto home and ended in a handshake Sunday night, people familiar with the matter said.

Mr. Zuckerberg promised Mr. Systrom the ability to run Instagram as a separate company, said a person familiar with the matter. But the speed with which the deal came together leaves many unanswered questions about the future of the two products.
"I don't think this has been fully worked out," the person said. "What are the boundaries? What is Kevin's authority?"
Mr. Systrom declined to comment.
There had been talk of Instagram maintaining its own office in an effort to keep itself independent of Facebook, people familiar with the matter said. Facebook instead decided to move Instagram into its Menlo Park, Calif., headquarters, one of these people said.
Facebook has a history of buying companies mainly for talent then scrapping the ventures. Sam Lessin, one of Facebook's senior executives, came to the company in October 2010 after Mr. Zuckerberg purchased Mr. Lessin's file-sharing service, Drop.io, which was later shut down. Location-based app Gowalla was disbanded in December 2011, after Facebook bought the company to hire its founder, Josh Williams.
With Instagram, Facebook needs to find a way to make use of the photo-sharing service's technology to improve its position on smartphones, where Facebook lags.
Mr. Zuckerberg has long believed that browser-based services, not specially designed apps, would be the way most people would access Facebook on phones. That hasn't come true, and now Facebook is playing catch-up in mobile with other social networks.
Facebook has 845 million users, only half of which use the mobile app. The company says in its regulatory filings that it gets no meaningful revenue from its mobile app and has only recently started to allow limited forms of advertising. That could create pressure to make money off of Instagram, something users worry about.
"Please don't let facebook ruin you," Felipov Oana wrote on Instagram's page on Facebook. "....We just don't need more features and we don't need ads."
Roelof Botha, a partner at Sequoia Capital, which invested in Instagram last week just before the deal closed, was the former chief financial officer of PayPal when the company was bought by eBay in July 2002 for $1.5 billion. He said the key to making an acquisition a success is striking a balance between keeping the company independent and taking advantage of the resources of the larger company.
He said it was very important that PayPal and eBay separated their offices, email, websites and CEOs. "Having a separate building may seem silly but it sends a subtle cultural message," he said. "It creates a culture of accountability."
Mr. Botha dealt with this challenge a second time when he was a director of YouTube, which was sold to Google in 2006 for $1.65 billion in stock.
One reason for the success is that Google was deliberate in saying that revenue and profit weren't the priority in the short term. That allowed the company to keep growing at a rapid pace and cement its dominance, Mr. Botha said."Google wanted to build the world's largest online video company," he said.
The speed with which the Instagram deal was struck shocked venture capitalists who had just invested $50 million in the company Thursday evening. The new venture capital firms that invested—Sequoia, Thrive Capital and Greylock Partners—were excited to build Instragram into the next Facebook, a person familiar with the matter said.
"It's really bittersweet," the person said. "Kevin is going to continue to build Instagram into what he originally envisioned," added the person. "This company will remain completely independent."