So here is the headlines of the day, Facebook buys Instagram for 1 billion USD. In Indian Currency it translates to a massive 500 Crore Rupees.
So why would such a top web
site like Facebook buy an iPhone app which has merely 6 employees and virtually no revenue model. Om Mallick of GigaOM pointed that Facebook opted for Kill-the-Rival strategy, a very common in Silicon Valley.  Forbes  pointed out that Facebook wants it to become a Pinterest rival.Meanwhile in January,  Instagram has reached 30 million registered users who shared photographs using it.
But, why did Facebook Buy Instagram?
Facebook has 845 million monthly active users out of which 483 million use Mobile Services. Since most of the Instagram users are active on Social media (Facebook or Twitter), the net user gain (No. is users who use Instagram but not use Facebook) for Facebook would be about 10 Million monthly.
Is it a good deal?
Facebook spent 1 Billion $ for getting 10 Million Active users or  has actually paid 10$/user.  Now consider, Facebook ads on Google adwords. Whenever if you search Abhishek Bharadwaj Google, a Facebook ad comes up saying Find Abhishek Bharadwaj on Facebook.  If you are an Adwords advertiser, then you would know that the keyword used for such an ad is Your Friend.  When I made a search for Your Friend on Adwords Keyword Tool, the average CPC I found was Rs 45 which roughly equals 1$.  This means Facebook had to pay 1$ for each  new user who clicked its ad on Google.
 Why did Facebook pay 10 times more money ?.
Here I resort to some approximations:
Your Friend keyword displays the ad only when you search any name already in your Google’s contact list. This list is derived from various Google products like Google Plus, Orkut, youtube, Google Buzz etc. most of which have the  networking concept  and so the 70%  of  list members are likely to be already on Facebook.  A simplification of the analysis means that of every 10 searches made for Your Friend keyword, 7 are likely to be an existing Facebook user.
The probability of a user joining Facebook after clicking the ad is 50 percent (the minimum I assume, though no official data provided by Facebook).
Let us suppose 100 users clicked the ad, which did cost Facebook 100$. Out of which 70 are existing user,while 30 are potential user. Â Out of these 30 users, 15 (50% of 30 ) are likely to Signup as a new users.
What is the ROI then??
Facebook ends up paying 100 USD for 15 users. If we consider the fact that all new signups do not become active users, then out of these 15 users, only  10 users would remain active. So  the return of Investment is actually 10 users per 100 $ spent which is approximately same what Facebook is paying Instagram for.
Facebook  has purchased 10 million users at a cost of 10$/user from Instagram which is same what it has been doing with Google. So it is  like just another user growth campaigns for Facebook.
Thats not all
There are added bonus to this deal. Instagram dealt mainly with iPhone and Andriod users who represent the upper and middle  echelon of the society derived mainly from Business Class.  A section of users which spends money Online most of the time is not spendthrift and is addicted  to E-Commerce.  Thus such users would provide greater ROI to Facebook advertisers  which would further add to the value of company.
Upon announcement this morning, Instagram almost went viral. It became the most searched on Google, it was topping the trends on Twitter thereby fetching more  publicity, more signups , more app download. A person like me who hasnot ever used Instagram is writing about its prospective business model. Though it would directly affect Instagram, but somehow it would  help Facebook + Instagram pair  in future.
This is a blog post by Abhishek Bharadwaj, Founder of Biharprabha. The original article appeared here