It’ll take FB over 9 1/2 years to pay off Instagram

I’m sure I’m not the only one wondering how Facebook arrived at that stunning $1 Billion valuation for Instagram. The entrepreneur in me had a fit of rage when I heard valuation in comparison to many revenue generating companies out in the wild. Did a bidding war with Google really drive the price that high? But after the initial WTF wore off, I decide to do a little calculation to understand the value behind the numbers.

TL;DR - Facebook is looking good by 2022.

First off lets start with some assumptions:

  • Instagram users: 40M
  • Advertising cost per thousand impressions (CPM): $0.50 (FB average)
  • Ratio of actions (comment or like) to pageview: 10:1

The user number is a liberal summation of iOS users (30+ million) and an assumed increase in Android users due to their recent release (slightly fuzzy number on the high side). A 50 cent CPM for advertising against user generated content is pretty standard. The last item, ratio of actions to pageview is just a proxy to ballpark their pageview potential for advertising. Its a very crude number but it’ll work for our back of the envelope calculation.

Onto the facts:

  • Acquisition price: $1B
  • Comments/day : 6,998,400.00
  • Likes/day:  49,680,000.00

Both the comments and likes per day were announced at SXSW. The acquisition price is a little fuzzy since its a combo cash and equity deal but it’ll do for our purposes.

Here’s the calculation to figure out approximately how many pageviews (for our advertising calculation later) Instagram was generating:

( (Comments per day) + (Likes per day) ) * (Ratio of actions to pageviews)

OR

( 6,998,400 + 49,680,000 ) * 10 = 566,784,000

OR

566,784,000 / 40M = 14.17 pageviews per user per day

So Instagram was generating a little more than half a billion pageviews per day. Not bad to be honest. Their user engagement numbers are pretty ridiculous for the relatively small size of the network.

For facebook to break even on pageviews, here’s how many they’d need per user:

( acquistion price per user ) * ( 1000 * (1/CPM) )

OR 

( $25 ) * ( 1000 * (1/0.5) ) = 50,000 pageviews per user

Then for the final calculation its just a matter of figure out how long 50,000 impressions at their current rate would take:

( break even pageviews per user) / ( pageviews per user per day)

OR 

( 50,000 ) / ( 14.17 ) = 3,528 days = 9.67 years

So Facebook should be sitting pretty by 2022. Obviously, I didn’t factor in the time value of money which one of my colleagues put somewhere in the 40+ year range but I’m pretty sure I’ve spent too much time thinking about this as is.

Conspiracy Theory - contains fair amount of crazy (don’t take this too seriously).

Oh and one last thing I can’t shake about this deal. Since the numbers don’t seem to justify the expense, I’ve been wondering if this wasn’t a sly way for Sequoia, Thrive, Greylock and Benchmark to up their stake in Facebook before the IPO. This deal bypasses the hold on secondary market trading of Facebook stock.