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Should Facebook Investors Worry About the "End of Instagram"?

By Leo Sun – Sep 29, 2018 at 10:27AM

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Is the social media giant slaying its golden goose?

Instagram founders Kevin Systrom and Mike Krieger recently left Facebook (META 1.09%) amid reports of rising tensions between the subsidiary and its parent company. Facebook acquired Instagram for $1 billion in 2012, and kept both founders with the company over the past six years.

Systrom was Instagram's CEO, and Krieger was its Director of Engineering. Losing the company's two founders so abruptly likely stunned many Facebook investors, who consider Instagram to be the company's core growth engine. The Verge's Casey Newton lamented that Systrom and Krieger's departures marked "the end of Instagram as we know it."

Instagram founders Kevin Systrom (center right) and Mike Krieger (center left).

Image source: Instagram.

Should Facebook investors worry about these resignations? Or were the departures inevitable as Facebook tightens its control over its once-autonomous subsidiary?

Startup founders usually leave after an acquisition

It isn't unusual for founders to leave a company after an acquisition. Founders are often retained as the subsidiary's leaders, but they frequently end up clashing with higher-level execs as their start-ups are integrated into the larger company's operations. Systrom and Krieger already outlasted other founders who were acqui-hired by Facebook.

For example, WhatsApp was acquired by Facebook in late 2014, but its co-founder Brian Acton resigned last September amid conflicts about user privacy and the monetization of WhatsApp. Co-founder Jan Koum also resigned from Facebook's board of directors in April, but remains formally employed by the company in a "rest and vest" situation.

Palmer Luckey, who sold Oculus VR to Facebook for $2 billion in 2014, left Facebook in 2017. However, Luckey's departure was seemingly related to negative PR surrounding his support for a pro-Trump group and a patent infringement lawsuit with ZeniMax, rather than direct conflicts with Facebook's executives.

Why Systrom and Krieger's departures were inevitable

Facebook spent billions of dollars on Instagram, WhatsApp, and Oculus, so it clearly had long-term plans for monetizing the platforms. In the early days, Facebook emphasized that those platforms would remain autonomous, and that they should focus on expanding their user bases and ecosystems instead of generating revenue.

A group of young people take a selfie.

Image source: Getty Images.

But once those platforms' user bases grew large enough, Facebook needed to start monetizing them with ads and other features. It would also need to tether them to Facebook's core platform, which houses most of its data for targeted ads.

Facebook's financing, backing, and support helped Instagram grow from 90 million monthly active users in January 2013 to 1 billion in June 2018. Instagram, unlike WhatsApp, seemed happy to monetize its network with targeted ads, brand-sponsored posts, and shoppable links. Instagram also aggressively cloned popular features from Snap's (SNAP 1.74%) Snapchat to win over younger users.

However, conflicts between Facebook, Systrom, and Krieger arose as Facebook tightened its grip on Instagram. Facebook began encouraging users to cross-post Instagram posts to Facebook, persuaded Instagram to add an "Open Facebook" menu item that featured Facebook's notification alerts, and started blending together Facebook and Instagram push notifications for certain users.

Facebook also worried that Instagram would cannibalize its own app. That's why it stopped attributing Instagram photos shared on Facebook to Instagram (which throttled Instagram's exposure and downloads), and why it expressed concerns about Instagram's IGTV pulling video users away from Facebook Watch.

All those moves clearly infringed on the autonomy that Facebook reportedly promised Instagram during its acquisition six years ago. A recent reorganization also put Systrom under Facebook chief product officer Chris Cox's management, which reportedly frayed Systrom's relationship with CEO Mark Zuckerberg.

Will Facebook kill its golden goose?

Instagram's founders are leaving at a critical time for Facebook, which reported its slowest sales growth in nearly three years last quarter. It expects that slowdown to continue over the next few quarters.

Facebook's core social network faces ongoing questions about its role in spreading fake news stories, its vulnerability to foreign propaganda, and privacy concerns following the Cambridge Analytica scandal. Facebook is also struggling to retain teen users in the U.S., who tend to favor Instagram and Snapchat.

Instagram is considered a beacon of light amid all that chaos. KeyBanc analyst Andy Hargreaves recently estimated that Instagram could generate nearly $9 billion in annual revenue this year (16% of Facebook's estimated sales) and $22 billion in sales by 2022.

The departures of Systrom and Krieger cast a dark cloud over that rosy forecast. There's a risk that Facebook could kill off Systrom's IGTV and IG Shopping projects, then bundle even more of its features into Instagram -- which could bloat the app and alienate users. If that happens, Facebook might kill its golden goose, and push users and advertisers toward rival platforms like Snapchat.

Leo Sun owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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