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

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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.”

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

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