What Facebook Is Really Buying With Instagram (Beyond Photos)…

Facebook’s acquisition of mobile photo app Instagram earlier this week wasn’t especially surprising (though the $1 billion price tag may have been). Mobile is a fertile, untapped channel for the social giant, but a growing risk factor the longer the opportunity remains unrealized. And with $5 billion to $10 billion in cash reserves expected after its IPO next month, Facebook could quickly become an aggressive and powerful buyer in much the same way Google has.

BIA/Kelsey foresaw this specific acquisition months ago when Facebook first filed its S-1, as explicated in our February IPO report:

“Facebook will soon have enough cash to buy its way into most opportunities. The question is where will it spend? As it invites deeper sharing through the expansion of Open Graph, Facebook will consider buying sharing apps that fit the vision of its platform. Likely genres are photo (Instagram, Path, Pinterest) and video (Klip, Tout).”

Instagram has exploded onto the tech scene as a leading photo-taking-and-sharing platform, raising $57 million over the past 14 months to create delightful visual experiences through unique filters for its mobile users. It’s a mobile-first and mobile-only product, though one without any material revenues.

What’s more compelling than what Facebook is acquiring, though, is what it is actually buying (figuratively) — and here, those have two very different meanings.

Facebook’s richest asset, even if not fully monetized, is its expansive and engaged user base — 845 million strong. That base is swiftly migrating to mobile. In the cases of younger audiences and users in emerging nations, the Facebook desktop experience may be bypassed entirely. More than 50 percent (50.3 to be precise) of that base now accesses the network on mobile devices. Yet Facebook makes not a drop from the channel.

Recently, it began experimenting with Sponsored Stories inside mobile news feeds, a first step toward monetization. Facebook’s effort to redefine the mobile advertising experience through social context is still in its embryonic phase, however. The network needs time to fertilize the strategy, scale it across its massive base, and translate it into a revenue game-changer. It can’t do that if the rapidly growing mobile base departs for other pastures (or platforms), or even spends less time engaging within its walls. Photo tagging and sharing has been the greatest stimulant to growing Facebook’s engagement and time on site metrics. These behaviors and metrics must be safeguarded, and even extended, on mobile. Instagram posed a threat.

Yes, Facebook’s buying a direct competitor in the all-important photo domain. And with Instragram comes a talented team that can bolster its mobile platform, even as Instagram remains a standalone app. But what Facebook is really buying for $1 billion is…TIME. Time to figure out mobile in a multibillion-dollar way before the user base, and the opportunity, erode.

Now, what will it buy next? Mark Zuckerberg claims that he “won’t do many more of these [types of acquisitions], if any at all.” However, considering Facebook’s outsized goals, which we believe include creating a ubiquitous payments system and building both advertising and content distribution networks, then the spree may just be starting.

We’ve long thought that with Facebook’s deep hooks into third-party sites through Connect, which enriches its already-robust social data trove, the network is well-positioned to launch an ad network across both desktop and mobile. As such, it could have its eye on a demand-side platform, sell-side platform, or ad exchange that improves its ad targeting and delivery capabilities (akin to Google’s acquisitions of DoubleClick, AdMob and AdMeld).