The Billion-Dollar App: How Apple Propelled Instagram to Fame and Fortune

4/10/12Follow @wroush

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sign up 300,00 users within the first eight weeks after its launch in October 2010, which gave it momentum that none of its competitors were ever able to overcome.

And how did it sign up those users? Partly through word of mouth, but mostly because it cracked the “top 20″ charts in the iTunes App Store early on, and stayed there as users begat more users. And didn’t just win popular acclaim: In December 2011, Apple anointed Instagram as its “iPhone App of the Year,” which boosted downloads even more.

Perhaps you thought Facebook itself grew pretty fast back in 2004 and 2005, when it was spreading like wildfire across college campuses? Well, it turns out that favored placement in the app stores is an even better way to achieve rapid growth.

“If you think about Facebook’s growth, it grew virally, largely through e-mail-based invitations,” says venture capitalist Kevin Spain, who follows the mobile business as a general partner at Emergence Capital Partners in San Mateo. “But when you look at Instagram’s growth, a lot of it came through placement in the App Store. The reality is that if you don’t have great placement in the App Store—if you’re not a featured app—your ability to acquire users is severely hampered. But if you become one of the top 20 apps, your growth just continues to accelerate.”

Apple isn’t the only kingmaker in the mobile app world: Instagram is also benefiting from top billing in the “social” category in Google Play (formerly known as the Android Market), where it’s even ahead of Facebook’s Android app. Amazon, obviously, offers similar lists of top-selling apps and other products, and through its best-seller lists, the New York Times has been telling us what books to buy for decades.

But what’s unprecedented about the mobile app store experience is that so far, the app store owners are in control of both distribution and discovery. With the possible exception of app review sites on the Web, there’s no viable alternative to the app stores themselves for finding and buying new apps. (The first startup that came along to challenge Apple’s role in iOS app discovery—Chomp—promptly got acquired by Apple.) The bottom line: without the dual system of promotion and instant distribution that Apple created and Google copied, it’s very hard to imagine that Instagram could have grown as fast as it did.

Of course, there’s a major downside to the reward system Apple invented. The “discovery barrier”—the difficulty of making it into the top-app lists or getting picked as a “new & noteworthy” app—means thousands of very good apps never get noticed. Which may be contributing to what activist Eli Pariser has called a filter bubble culture, where people only learn about content or products that are already deemed popular.

But for those who pierce the bubble, the rewards are lavish. Whether or not it really meant to—remember, Steve Jobs was initially opposed to allowing third-party apps on the iPhone—Apple has pioneered a distribution system so effective that it makes the last 15 years of the Web’s evolution look tame by comparison.

This may be the biggest lesson of the Instagram deal: in the Web/mobile arena, the pace of innovation continues to accelerate, which means no one is really safe. Today’s entrepreneurs benefit from cloud computing platforms that allow them to get up and running with almost zero capital expense. They have open-source tools and other off-the-shelf building blocks that allow them to assemble a basic app quickly, which means they can focus on refining the user experience. And thanks to Apple and now Google, they’ve got built-in marketplaces so powerful that huge windfalls await those who can crack through the discovery barrier.

“If Facebook—which was seen as one of the companies with incredibly strong network effects—is potentially made vulnerable by a two-year-old company with no revenue and a fairly simple photo-sharing app, then anyone is theoretically vulnerable,” sums up Emergence Capital’s Spain. “It doesn’t matter if you are 30 years old or three years old, there is always someone younger and smarter coming up underneath you. And if you are not embracing mobile and cloud and open-source tools to iterate rapidly, you are going to be lapped very quickly.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • Sasha

    Excellent article.

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  • Nate

    An astute article. Two responses/points:

    1. The big story really is the purchase price. It’s easy to explain why Facebook would want to acquire Instagram. It’s much, much harder to explain why they would pay so much for it.

    2. Regarding the App Store, Instagram’s meteoric rise reveals how deficiencies in the “discovery barrier” are distorting the marketplace. Apple has evidently decided not to invest a lot of resources in reviewing apps and finding the diamonds in the rough. That’s their choice, but what’s really surprising is that no third party has taken up the slack. Sure, there are lots of app review sites out there, but the vast majority are pretty mediocre and to my knowledge no one has risen out of the pack. As a result, consumers are left floundering around and relying on the App Store, which is very weak.

  • http://www.xconomy.com/author/wroush/ Wade Roush

    Nate: Thanks for your comment. To respond to your responses…

    1. I agree that there’s probably an interesting story behind Facebook’s willingness to pay what, to the rest of the world, seems like an insane price. But I guess I see it mainly as one of those bizarre, bubbly things that happen when people invent cash machines.

    2. You’re absolutely right that the iTunes App Store is horribly broken from the standpoint of anyone trying to discover good apps. I was trying to make the point that Instagram was one of the lucky and/or skillful companies that figured out how to exploit the parts of the ecosystem that do work well for the anointed few — the top app lists, the “new & noteworthy” lists, etc. For companies like Instagram, the deficiencies and distortions in the marketplace turn out to be great competitive “moats.”

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