The tech world is abuzz with Facebook’s recent acquisition of Instagram for $1B. The debate on why Facebook paid such a hefty price rages online -- everywhere from the NYT to Wired.

Let’s summarize the product Facebook bought:

• Instagram is a dead simple, lightweight photo sharing app that launched in Oct 2010
• They have raised 57.5M in funding from big names like Sequoia to Jack Dorsey (cofounder of Twitter & Square)
• 35M users (they racked up over a million of Android users within 12hrs of their Android app launch!)
• “Pre-revenue” i.e. Instagram doesn’t make any money

Speculated reasons for the price-tag range from competitive play to renewed talks of a bubble.

Cost per User

Source : Wired

Facebook paid ~$28 for each user, which isn’t outrageous compared to many other acquisitions. The real question is how much these users are worth. If you consider that many of these users are already on Facebook and that they don’t generate any revenue, it’s hard to say quantify their actual value.

                                                              Cost per Employee

The acquisition cost per employee for Instagram is $77 million, which is outlandish compared to the median of 3 million. Such a premium per employee doesn’t suggest that this was an effort aimed at recruiting engineering talent.

But maybe we can take Facebook CEO, Mark Zuckerburg at his word: “We don’t plan on doing many more of these, if any at all. But providing the best photo sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together.” This reasoning supports the arguments made in The Facebook Effect, which suggests that photo-sharing and tagging were crucial in Facebook’s viral growth.

If controlling the photo sharing world was their motive, the move is simultaneously offensive and defensive. Offensive in that it allows Facebook to improve its photo capabilities (don’t be surprised to see Instagram’s iconic filters made available for our FB photos). It’s also defensive because it prevents Google+ or Twitter from competing with Facebook’s position as the dominant social network for photo sharing.

At the end of the day, we can’t know why Facebook bought Instagram; we can merely speculate. Nonetheless, watching how this will play out will definitely be interesting.