Friday, April 20, 2012

April Observations - What a Difference Seven Years Makes! Facebook Acquires Instagram – a $1 Billion Imaging-Related Transaction



also published in The Hard Copy Observer, April, 2012


Observations: What a Difference Seven Years Makes! Facebook Acquires Instagram – a $1 Billion Imaging-Related Transaction

[April 20, 2012] Imagine if you will, going back seven years and trying to look to the future of the printing and imaging business. Then picture (pardon the pun) a headline –with company identities obscured—that involves an imaging-related acquisition that will take place in April 2012. A top-tier technology company has boldly announced its $1 billion buy-out of a photo capture-and-exchange company, and you must come up with the names of the two players involved.
Those of us who have been around the printing and imaging industry for awhile might have assumed that back in 2005, we would have been able to guess the identity of the companies involved in this seven-years-out, billion-dollar deal. We might have looked at the recent (March 2005) acquisition of Snapfish by HP and figured a deal might include one of the many Snapfish competitors as the acquisition target. The acquiring company would have to be a going concern and no doubt already in the imaging space but looking to bolster its arsenal in the fast-moving online world.

A look at some of the details of the HP/Snapfish deal might help in this little puzzle. In that case, HP was estimated to have forked out $300 million for the five-year-old Snapfish, so with $1 billion at play, we would have to guess that the mystery acquiree would have (even adjusted for moderate inflation over seven years) roughly three times some of the metrics that are compiled when assessing the value of a deal.

Hmm…Snapfish had 90 employees at the time, undisclosed but material revenues, and 13 million subscribers for the firm’s “online photo service,” which according to CNET’s coverage at the time, included 40 percent who print some photos at home, with centralized printing by Snapfish (coming from an assumed nearly 100% of the 13 million) as the primary basis of those undisclosed revenues. This point about home printing was due to the fact that the deal was seen by some as an HP “pivot” in terms of where photos would and should be printed–after long advocating “print your pictures at home with HP printers, HP paper, and HP ink,” the Snapfish deal allowed an opportunity for somewhat of a repositioning. CNET quoted HP vice president Larry Lesley speaking to the convenience factor, saying, “Some of those customers want someone else to do the printing for them,” and with respect to the relative economics, Lesley noted, “There will always be a premium for the convenience of printing in the home.”

But with no more clues to the future and a few dead-ends (for example, who would have guessed then that a firm like Kodak that was aggressively expanding with a war chest for acquisitions in 2005, would be in bankruptcy seven years later?), we throw all the cards over and ask for help. And the company names (drumroll please): Facebook and Instagram.

Remember that, we were assuming that the top technology company making the billion-dollar acquisition would be someone with which we are familiar seven years before—an industry incumbent in the imaging space, still powerful but feeling slightly left behind, and needing an infusion of technologies and customers from a younger, fast-growing tech firm, and with the cash and stock to carry out a deal.

Facebook and Instagram actually live up to those descriptions. Facebook became the world’s largest online repository of photos some time ago, and despite some efforts to capture prints of those images, for the most part they are happily shared among Facebook’s hundreds of millions of users via online (i.e. non-hard-copy) sharing. When preparing for an impending IPO and with an estimated valuation of up to $100 billion (http://www.zdnet.com/blog/facebook/last-facebook-pre-ipo-valuation-is-highest-yet-1028-billion/11229) (for reminders, market caps of our example market leaders, HP and Xerox, currently hover at $50 billion and $11 billion, respectively), many speculated that now was a convenient time (pre-IPO) to snap up the ever-more-popular photo-sharing company Instagram.

Instagram, founded only in 2010, and the firm’s 13 employees make the historical Snapfish number of 90 at buy-out seem huge. Instagram’s user base, however, has ballooned to 40 million users in the days following the Facebook announcement, a number also buoyed by the addition of Android app to the firm’s until-now-iOS-only offering. So maybe there’s our 3x comparison – $300 million for Snapfish’s 13 million users and $1 billion for Instagram’s 40 million?

As far as revenues? Instagram has not a whit, which helped generate a chorus of “what the?” comments from the financial community over Facebook’s 10-figure offer. And as for printing? Well, there have been flurries of interest in printing Instagram prints, by third parties (see Lyra Insider blog, “Instaprint – Hot Combination Includes Print”, , for example), but so far that capability generally remains an untapped opportunity.

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