The Correct Price for $1-Billion-Instagram is $175,500

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The Correct Price for $1-Billion-Instagram is $175,500

By Andres Garzon
April 23 New York

Instagram was sold to Facebook for one billion dollars and everyone is wondering how on earth that happened. Is it that expensive to develop an app like that? After crunching some numbers, let's see if a well thought out quote remotely matches the one billion dollars paid and if there are more ingredients in the price.

If you are not part of the group of 45 million people who has downloaded Instagram, then let’s quickly explain what it actually is. Simply put, it’s a free photo sharing app that launched back on October 2010 and has received over 37,000 reviews. The app has 18 different filters that can be applied to a user’s new or existing pictures, and these can then be shared to different social networking sites including its own social network. A simple concept and a small app (12.5MB), that works on the iPhone (new and old models) as well as Android phones.

Now that the basics are out of the way, let’s move on to the meat of this post and figure out how much it ostensibly cost to build the app.

Best way to go about this is to use a pricing tool to create the quote as if you’d be pricing it out for a prospective client or your own shop. Keep in mind that the costs are just for the labor and the additional costs involved in the development of the app itself, not the marketing, or any intangibles that would raise the cost significantly. Final caveat which must be mentioned is the fact that Kevin Systrom started Burbn back in 2008 upon graduating from Stanford and Instagram was a subproduct of this company, so the story is obviously a bit different from what I’m writing, but for the purpose of the pricing exercise, we’re going to assume differently.

When you’re looking to build software, how should you approach this endeavor? The majority of software products start with the discovery period where the idea guys hire someone who has the know-how of building scalable apps, as well as doing research, focus groups, user testing and experience prioritizing functionality, to achieve a goal within a specific timeframe and budget. Let’s price this person at $70 per hour and estimate that 60 hours of her time are enough to help out the “idea guys” in this process doing the following tasks:
  • User Outreach
  • Requirements Gathering

Once the discovery period is over, there’s usually a clear idea of the product that’s ready to be developed, so the next step is to design the first set of wireframes for the initial app. For that, let’s say that they hired a famous UX designer that will work with them during the whole course of the project, and because he’s a rockstar, he’ll charge $80 an hour. After several meetings, the UX designer that Mike Krieger (Co-Founder) selects, tells them it would take him 3 weeks to complete the whole experience with 2-3 rounds. It would have the following deliverables:
  • Site Map
  • User Flows
  • Interaction Models
  • Wireframes
  • Functional Specifications

If we consider that Burbn put a lot of effort into the design (which they did), it’s safe to say they did a couple of revisions. So let’s say the UX guy recommends a designer that’s perfect for the job - she’ll take 4 weeks to design the whole application, including: logo, branding guidelines, color guide, PSDs for every screen on the wireframes and basic copy. The tasks are the following:
  • Competitive Analysis
  • Sketches
  • Moodboards
  • Font Exploration
  • Color Exploration
  • Rounds
  • Creative Brief

As design was being done, Kevin probably started development, but for the purpose of this pricing exercise, let’s pretend he hired developers. The Burbn founders mentioned it took them eight weeks to build Instagram, therefore we’ll pretend as if they hired three great developers at a rate of $90 per hour and the action items were divided as follows:
  • Iphone Front End
  • Storyboard Implementation
  • Applying Design to Storyboard
  • Iphone Back End
  • Authentication
  • Filters Implementation
  • Simple-iphone-image-processing
  • Image Manipulation
  • Simple-iphone-image-processing
  • Popular Photo Feature
  • Social Network

We believe the API took longer than eight weeks and they were going to use an awesome product development company, so they developed a strategy that included the following items:
  • Web API
  • Authentication
  • Users
  • Iphone Hooks
  • Relationships
  • Media
  • Comments
  • Likes
  • Tags
  • Locations
  • Geographies

Let’s also assume they hired a company to do the promotional website for the app (in this case, and for that they came up with a quote of $25,000 which was structured without a CMS because of the simplicity of the site. The build of the promo site was planned in the following manner:
  • Wireframes
  • Design
  • HTML Markup
  • Custom Modules (Form)
  • Implementation of Desk Customer Service
  • Deployment

After Burbn shipped the product, they went into a closed alpha with friends and colleagues, but again, let’s pretend they hired a QA firm to do this job. The QA company would’ve probably assigned three people to test the app and ramped a user testing campaign across three different cities. Let’s consider they charged a flat rate of $30,000 for a thorough QA and user testing.

Lastly, since Kevin and his team had to spend money on hosting, computers, Apple Developer’s program and licenses for the software, we’ll add these to the quote as additional costs. As well as other line items that must be included, such as rent, phone, internet and all overhead costs that for the exercise of this post we’ll settle on 15% of the total cost.

What’s next? Well, now we can take a look at the quote!

The total cost of building Instagram could have well been around $175,500, and, as mentioned before, it refers to the price of hiring experts to build an app like it (attached is a PDF with the pricing exercise for your reference). So where’s the justification of the $1 billion paid by Facebook? Personally, I think it’s well worth it, and here is why...

Valuations are based on several factors and considering just a few is where a lot of people get caught. The first aspect that we just analyzed is the cost of building the app, don’t get caught on that one. The second aspect is the potential of Instagram. It's the first strictly mobile social media app that scaled so much - The potential of that growth has more monetary value than any functionality of the software.  The user base surpassed 40 million already and launching the Android app generated an additional 5 million in less than a week. At that pace, Mashable said “Instagram was beating Facebook at its own game, and the social network needed to stop it before it was able to do more.”

The third aspect of the valuation is the team. Thirteen employees working in different roles did a spectacular job at implementing the whole concept of Instagram. Starting with great programming, UI and UX development done by Mike Krieger, Phillip McAllister and Ryan Gomba. An excellent job at creating the community which was mainly the work of Dan Toffey from Washington. They also worked together with Josh Riedel on expanding the reach through partnerships and got amazing results. Moreover, like in any fast growing startup, operations are crazy, therefore, hiring Amy Cole for this role brought her business development experience from Sephora, the retail cosmetic giant, and delivered extraordinarily.

We can go on and on about every employee, but the point is that teams are invaluable assets. Facebook not only bought the software and potential, they also paid big bucks to acquire the team. As we all know, hiring a bunch of employees does not mean they’re a team, and you can’t create a team out of celebrities. You’ll fail if you do that. A team has to be balanced out with people with different skills who play well with the company’s celebrities and can together deliver outstanding results. Instagram did just that.

In a nutshell, Facebook bought 3 different things: the software, a growing online mobile community and a team. One billion dollars is a fair price for the value that it brings to Facebook. Therefore, for those thinking that being a great developer or designer is the greatest asset you have, think twice. Development is such a small portion of what a company is, that the cost associated with it is almost irrelevant to the value of the results, the potential of the app and the team involved. Click here to see the final quote exported as a PDF file.

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