What the Facebook-Instagram Deal Means

As of about 1PM Eastern time, typing ‘Instagram monetize’ into Google would yield top results that only wondered aloud: ‘How will Instagram monetize itself’ or something to that effect.

In fact, as Pinterest has ramped itself up to an eye-popping round, the tech blogosphere asked whether Instagram would be able to generate any cash for itself at all. Well, now, it doesn’t seem to much matter. Facebook has acquired Instagram in a billion-dollar cash-and-stock deal, just as the social networking titan is revving its engines for the IPO.

While, on the face of it, the Facebook-Instagram transaction is enough to roll eyes ($1 billion for a company barely two years old?!), for a social network looking to move into e-commerce, Team Zuck may well have scored a bargain at a time they needed to defend their Achilles’ heel.

“This is an important milestone for Facebook because it’s the first time we’ve ever acquired a product and company with so many users,” Facebook CEO Mark Zuckerberg said in a statement. “We don’t plan on doing many more of these, if any at all.”

Pinterest’s challenge to Facebook comes in the company’s linking marketing to sharing and the Instagram acquisition helps Facebook integrate more mobile users—a group that will only continue to grow, since the photo-sharing startup just launched an Android app. Pinterest has been pegged the third biggest social network behind, of course, Facebook and Twitter. This is for good reason: better than either of its social networking predecessors, Pinterest is monetizing clicks.

The Instagram acquisition isn’t just another small team pickup by Facebook, which has made more than a dozen buys on its way to becoming a listed entity—but certainly nothing of this magnitude, ever. The deal marks a tacit admission the company is in danger of falling behind on its monetization campaign and that it is strategizing for the next phase of the social network’s development: into a commerce network. The deal also means that venture capitalists who were flying golden paper airplane term sheets at Pinterest, telling the company it had a $1 billion valuation, will have to come up with a better offer. If Instagram’s trajectory translates to $1 billion, Pinterest may well need IPO bankers sooner than it needs any more help from VCs. Or… maybe the company should wait a few months, and raise cash via crowdfunding, as the single hottest startup on the planet. Then, let’s see how much venture capitalists love crowdfunding once it takes away the asset class’ newest cash cow.

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