Facebook celebrates Instagram deal, but should they?

Facebook recently announced a billion dollar takeover of Instagram, but the move may prove to be far from wise for its future.

It is obvious why Facebook is interested in mobile apps. It is undeniable that mobile apps are overtaking the internet apps, with more and more users switching from their computers to their phones. People have already started using their mobile phones to help with navigation, play online games, and in fact, do their shopping. This trend is even more significant in social-networking applications, with examples including news blogs and twitting. As such, it may come as no surprise for Facebook’s determination to break into the mobile world. Rival photo-sharing network provider Instagram, with its current 27m user base (with anticipated increase due to its recent incorporation of Android) may therefore look like the perfect choice.

But is paying a price of 9 zeros, almost all of Facebook’s liquid cash flow, a wise deal? Tech startups are heavily dependent upon innovation for customer retention, and burning all its fuel on something that is yet to generate profit may starve Facebook of innovation funds in the short term. And do bear in mind that many tech startups started with just one guy with a good idea (sound familiar Marc?) and a big stroke of luck. And guys with good ideas are in no short supply. One must therefore wonder just how many more acquisitions can Facebook make.

Facebook seems to be trying to kill off major competition before its IPO is complete, but in doing so is placing a huge bet on the absence of major competition in the short term and how their move will be perceived by the public.