Instagram Deal Is Looking Better and Better

Facebook’s Instagram option is looking like a better bet than it was a year ago. The social network agreed to shell out $1 billion for the revenue-free photo-sharing app. Even paid for partially in overvalued stock, the deal looked pricey. Instagram’s growth spurt – it passed 100 million monthly users in the first quarter – suggests Facebook is turning a defensive move to its advantage.

Quarterly results show Facebook is doing well – revenue was up 38 percent. Earnings rose only 7 percent, but this is for a good reason. Mark Zuckerberg’s firm is increasing investment in areas of growth. Facebook has a history of creating new services and only later figuring out how to make them pay. Mobile users grew rapidly from 2010, but the company only rolled out ads for smartphones and tablets a year ago. Mobile now accounts for just under a third of advertising revenue.

The Instagram purchase, however, was risky even by Facebook’s standards. There was no assurance a free photo app would ever make money. And it raised questions about Facebook’s capabilities. Social networks are built around photo sharing, so why couldn’t Mr. Zuckerberg’s band of hackers build a better app at a cheaper price?

Such concerns are receding. When the deal closed, Facebook’s falling stock price meant the acquisition was valued at just over $700 million. The real action, however, was in user growth. Instagram has doubled its monthly user base since the acquisition. That is faster than Facebook was growing at a similar size. Mr. Zuckerberg says he is in no rush to capitalize, but is focusing on capturing more users and improving the app. But he did tease investors listening to Facebook’s conference call by saying companies were putting content on Instagram and wanted to do more.

Instagram has not generated any profit yet. But the potential payoff is increasing as the photo service grows and attracts more young users. And Facebook’s trajectory in mobile bodes well for the company – eventually – to find ways to turn Instagram into cash. The option Mr. Zuckerberg bought is closer to being in the money.