One Billion for a Photosharing app that doesn't make any revenue. Zuckerberg gone crazy ? I would like to believe not. Zuckerberg is not loose with his money. He did even splurge on his car. He drives a Acura, extremely modest by the standards of Silicon valley czars. So, why is he splurging a billion bucks on a photo sharing app that doesn't make any revenue ? Although there is no way to justify the billion dollar valuation, I would like to think that there is method in Zuckerberg’s madness.

(Image courtesy slashgear.com)

Zuckerberg has essentially  made a big bet on Instagram. If Facebook has a chink in its armor, it is in the mobility space. Facebook was designed for the Computer and Browser era and hasn’t yet figured out the magic recipe for the mobile platform. Its Mobile users are exploding, but  hasn’t yet started monetizing on the mobile platform. Facebook clearly states this as a risk in its IPO prospectus. Instagram on the other hand is a killer mobile app. It is designed ground up for the mobile platform and is one of the hottest mobile app out there. It has over 30 million users growing like wild fire. When Instagram opened up on the Android platform last week, it started adding over a million usrs in a single day. Although I am not sure how exactly Facebook will take advantage of Instagram and convert it into a business model, but directionally safe to say that Zuckerberg is betting big on Instagram to plug the Mobility gap.

This is not is it an impulsive purchase that Zuckerberg made after a late night binge. Instagram has been on Zuckerberg’s radar for a long time now. Way back in 2004 when Kevin Systrom the founder of Instagram developed a service called Photobox to share large photo files, Zuckerberg offered him a job . Systorm politely refused. Subsequently, Zuckerberg made several advances  Mr. Systrom chose to keep it independent and focus on expanding it. Finally, Zuckenberg perhaps took inspiration from Godfather and decided to make an offer that Instagram could  not refuse.

Ok, granted Facebook is placing  is a big bet on Instagram. But does it still justify a billion dollars. While it does not justify a billion dollars, I feel Facebook can easily afford it. The reason I say that is because I believe Facebook is funding most part of the deal with FB stock and very little cash ( This is my guess. I have not come across in public domain the split of cash and stock ) . With Facebook valuation at over 100 Billion , it is not going to hurt Zuckerberg to shop around with a billion dollars in stock. On the other hand, if he paid for most part of the deal in cash, I would consider it brash since Facebook is nowhere as cash rich as Apple is. As per its IPO prospectus, its cash holding is about USD 4 Billion.

So, the net of it is that Zuckerberg has made a big bet on Instagram. A big bet no doubt, but a very affordable one for Facebook. If he wins, the upsides are huge ( potentially plugging the mobile platform gap to a good measure ) and if his bet does not materialise, the downside is not that bad. Look at it another way. Left to do nothing, the billion dollars would just be paper money sitting there doing nothing, but if Instagram clicks for Zuckerberg, that would be the best bang he could get for a billion bucks.