Why did Facebook buy Instagram?

A cool billion dollars? That’s how much Facebook has just paid to acquire free photo-sharing iPhone and Android app Instagram. While it claims to have more than 30 million users uploading five million photos a day with retro-style filters, it is a hefty price tag for a service that charges nothing for its use.

For that kind of cash, The Telegraph points out that Facebook could have bought The New York Times media empire, which has a similar market capitalisation ($942m) and more than 44 million users a month, some of who actually pay for doing so.

So what makes Instagram desirable to Facebook, which has its own photos service on its site?

1. Images play an important role in how Facebook hopes to interact with businesses in future. Facebook’s vice president of business and marketing partnerships told marketers at an event in London last week that images posted by brands tend to get twice the engagement rates of text posts.

Instagram is already used by many brands as a marketing tool. It has a large number of celebrity brands using the service to market themelves and their products (my timeline is full of Snoop Dogg promoting his Executive Branch cigars). Jamie Oliver uses it to post images of his food.

Corporate brands are there too. Starbucks posts pictures of its special offers to tempt users into stores. Burberry shoots its ad campaigns with Instagram filters to give its followers a taste of new collections and marketing. Meanwhile, Nike is a regular poster on Instagram.

While Facebook has many brands participating on the website already, the site is so massive that it is sometimes easier for companies to stand out on a smaller service such as Instagram, which is only dedicated to photos. Buying up Instagram takes out a potential rival to Facebook’s image services.

2. The Instagram photo filters are often mocked for trying to turn everything into a 1960s pastiche. But the truth is that the benefit of digital technology is being able to play around with the images you take on your camera and improve or adapt them.

So Instagram lets you make that blue sky looks an arresting violet. By cropping and applying a darker filter to that picture of a child, it looks like an expensive ad campaign rather than a quick shot of the kids. It lets those of us who would love to be professional photographers play at being better than we are.

Look in contrast at Facebook. The photo service is pretty basic – upload, crop, turn around. There aren’t the same options for making images look so arresting on Facebook. For any individual or brand with an interest in the aesthetic, Instagram is a step ahead.

3. Instagram is all about mobile. I can upload images in seconds on the go. It rarely ever fails. Meanwhile, I constantly have to update my Facebook mobile photo uploader and it still doesn’t always work for me. While Facebook has lots of mobile customers – 425 million monthly users in December 2011 – it is not nearly as usable for photos as Instagram.

Facebook has prior form in grabbing mobile-friendly talent. It bought up location-sharing service Gowalla in December. While the service has now closed down, the founder and his team have joined Facebook’s own operations. So Facebook has already shown itself willing to buy up mobile talent and add it to its own mix.

But is this worth $1bn? Already people are beginning to talk about a new dotcom bubble forming, where social services are massively overvalued. After all, what is Instagram’s revenue plan? It certainly isn’t clear how the app had been planning to make serious money to fund its continued expansion.

I guess it comes down to what Facebook hopes to get from the deal. Will data, insight and owning a potential rival be enough to justify that cool billion pricetag? Let me know your thoughts.