Facebook caused a considerable amount of comment yesterday with its $US1 billion ($NZ1.2 billion) purchase in cash and stock for Instagram, a photo-sharing application.
It is Facebook's largest acquisition and comes just months before the social media website is due to go public.
Much comment came from people stunned by the price for an apps maker without any significant revenue.
Reuters correspondents said it highlighted the rising stakes in the social networking market in which services such as Facebook need to constantly excite consumers with new features and mobile applications.
However, delving deeper into the deal reveals that although only two years old, Instagram has gained about 30 million users since it was launched in January last year.
The application allows users to add filters and effects to pictures taken on their iPhone and Android devices and to share those pictures with their friends.
Instagram said that as at the end of last year, its users had uploaded 400 million photos, or about 60 pictures a second, suggesting the sort of activity Facebook sought as it tried to wring revenue from mobile devices.
Instagram launched its Android app just last week, garnering more than one million downloads since them.
On the figures available, Facebook paid $US1 billion not for the application but for the access to 30 million users, some of whom will already be registered on Facebook, or just slightly more than $US33 a customer. The purchase also locks competitors such as Google and Twitter out of that particular market.
Given that Facebook generated $US3.7 billion in revenue last year and ended the year with $US3.9 billion in cash and marketable securities on its balance sheet, it is not such a big deal.
Facebook, which is expected to raise $US5 billion through the largest Silicon Valley initial public offering in May, will take on Instagram's entire team of about 12 employees.
Facebook will have looked at the company and wondered whether one of its main rivals Google would have been interested in acquiring Instagram to go with its Google+ application.
Instagram's management was already considering possible strategies to expand the service into a fully-featured social network.
Social Internet Fund founder Lou Kerner said Instagram was a property that would have been amazingly valuable to not just Facebook. Twitter was certainly in the hunt.
Facebook chief executive Mark Zuckerberg said in a blog post that the purchase was an important milestone for Facebook.
"It's the first time we've ever acquired a product and company with so many users. We don't plan on doing many of these, if any at all."
Facebook would continue to develop Instagram as an independent app that remained compatible with other social networking services.
Some tech industry observers noted the deal may ramp up the valuations on other fast-growing social media companies and app makers, such as Pinterest, as entrenched web players seek to snap up attractive assets and bolster their social capabilities to challenge Facebook.
