When Facebook (NASDAQ:FB) acquired Instagram for $1 billion in 2012, it kept on founders Kevin Systrom and Mike Krieger to run the social media company for Facebook. Last September, the two resigned amid reports of escalating tensions between the founders and Facebook management.
Those abrupt departures left a power vacuum at the top of Instagram -- Systrom was the company's CEO, and Krieger was its engineering chief. Last week, Facebook filled the management void with three of its own leaders: Nam Nguyen, Luke Woods, and Elisabeth Diana.
Nguyen, Facebook's engineering group chief, will become Instagram's head of engineering. Woods, who previously led the design of Facebook's app, will become Instagram's design chief. Diana, Facebook's corporate communications director, will also become Instagram's communications chief.
All three leaders have been with Facebook since 2011. Their appointments clearly tighten Facebook's grip on Instagram. But could this insider infusion do harm to the golden goose?
Facebook's previous conflicts with Instagram
After Facebook acquired Instagram, it emphasized that the company would remain mostly autonomous and separate from Facebook's core platform. Facebook's cash and support helped Instagram grow from 90 million monthly active users (MAUs) in January 2013 to a billion MAUs last June. Instagram slowly monetized its platform with brand-sponsored posts and shoppable links, and it aggressively cloned features from Snap's (NYSE:SNAP) Snapchat to retain younger users who were shunning Facebook.
All these adjustments were initially a win-win situation for both companies. But Facebook gradually started to merge the two platforms.
Facebook started encouraging users to cross-post their Instagram photos to Facebook, persuaded Instagram to add a clumsy "Open Facebook" item to its menu, and merged the two apps' push notifications. Facebook also nearly killed Instagram's IGTV because it worried that the streaming video platform would compete against Facebook Watch.
Those issues reportedly culminated in Systrom and Krieger quitting in frustration. The appointments of Nguyen, Woods, and Diana indicate that Facebook plans to exercise complete control over its higher-growth subsidiary going forward.
Why Facebook desperately needs Instagram
Facebook's acquisition of Instagram back in 2012 significantly widened its moat against Snapchat, its biggest threat among younger users.
Piper Jaffray's latest "Taking Stock with Teens" survey, which polled 8,000 U.S. teens regarding their favorite brands, still ranked Snapchat as the top social network with a 41% mindshare. Instagram ranked second with a 35% mindshare, while only 6% of teens preferred Facebook.
eMarketer estimates that Instagram generated $9 billion in revenues, or 16% of Facebook's top line, in 2018. That percentage could rise to 30% within two years according to KeyBanc Capital Markets analyst Andy Hargreaves, and account for nearly 70% of its new revenues by 2020 -- making Instagram Facebook's core growth engine.
Will Facebook kill its golden goose?
Integrating Instagram more tightly into Facebook might seem like a smart move. After all, merging the two ecosystems and accumulating more user data could help both companies craft better-targeted ads. However, Facebook could also spoil what has been a good thing for the company if it isn't careful.
Facebook's reputation has tarnished over the past couple of years by a series of privacy and security scandals. Its MAU growth in the U.S. and Canada has decelerated, with the sequential addition of just one million new MAUs last quarter.
An estimated 57% of Americans didn't know that Facebook-owned Instagram, according to a Spread Privacy report last year. That ignorance likely prevented Instagram from being vilified alongside its parent company and kept its popularity intact.
Facebook's attempts to tighten its grip on Instagram, along with a long-term plan to merge Facebook, Instagram, and WhatsApp messages onto a single system, are shattering that separate-entity illusion. This could cause Instagram's highly valued Gen Z cohort to abandon the platform and migrate to rival platforms like Snapchat.
Too early to draw conclusions
Facebook's appointment of three of its own veterans to lead Instagram has some already deciding that it's bad news for the subsidiary's autonomy and a potential problem for its popularity and financial performance. But investors should give these new leaders a chance to prove themselves and not jump to the conclusion that Facebook is about to gut its golden goose.