Start-ups everywhere looked up in awe when Facebook announced in early April that it had acquired Instagram for $1 billion. But there is much more to the Instagram deal than the acquisition of a mobile photo-sharing app.
The deal is all about big data — the technology to handle it and the potential to monetize it, according to experts. "What makes Instagram interesting is that the company itself wrote its own database to handle the massive influx of data it began to receive a few years ago," according to Keith Lubell, CTO at Berkery Noyes, an independent investment bank that provides mergers and acquisitions consulting services.
In just 18 months, Instagram, which runs Ubuntu Linux 11.04 on Amazon EC2, scaled to more than 30 million users worldwide, reportedly with only two and a half back-end engineers. And when the company launched its Android app this year, it signed up 1 million new users in 12 hours. "Scaling [means] replacing all the components of a car while driving it at 100 miles per hour," Instagram co-founder Mike Krieger said shortly after the acquisition was announced, during a presentation at an Airbnb event for employees and members of the real estate community/marketplace.
Facebook -- along with search engine giant Google — is among the global companies with the biggest need to scale quickly. As a result of the acquisition, Facebook will be able to benefit from Instagram's proprietary database technology while it actively tries to figure out how to sell and monetize the terabytes of data that its 500 million-plus users generate — especially about their whereabouts and spending habits.
"With smartphone information, they will soon be figuring out where the people are -- how many, for example, are going into the Gap store on 5th Avenue and are buying something there," says Larry Tabb, CEO and founder of TABB Group. "The Facebook/ Instagram deal is all about big data and social networking, linking people together, and figuring out where data can be mined and monetized. There are people who can understand and monetize the value of individual profiles and connections. To a certain extent, that's very valuable data."
If Facebook can avoid creating the appearance that Big Brother is tracking users' every step online, it stands to make billions more dollars — which is why the acquisition is probably worth every penny of that $1 billion price tag to Mark Zuckerberg's social network. In fact, in terms of large merger-and-acquisition transactions centered on big data, Facebook's acquisition of Instagram isn't unprecedented, notes Berkery Noyes' Lubell.
In 2010, there were two infrastructure software deals that involved big data, each of which totaled more than $1 billion in value, he points out — EMC Corp. acquired Isilon Systems, which helps enterprises manage their data through scale-out network-attached storage (NAS) solutions, for $2.2 billion; and IBM acquired Netezza, a provider of data warehouse and analytics technology, for $1.7 billion.
[The rise of data aggregators pulling information from various cloud-based sources will make Big Data more usable for investment managers, contends StatPro's Andrew Peddar.]