Inside Facebook's Building 14, just a door down from Mark Zuckerberg's office, Kevin Systrom and the Instagram team plot the future of their beloved photo-sharing app. It's no coincidence that Systrom is just a 15-second walk away from Zuck, close enough to stroll by the all-glass "aquarium" where the CEO entertains such visitors as former secretary of state Condoleezza Rice. Even in the meritocratic world of Silicon Valley, proximity to power matters. Systrom and Zuckerberg usually meet three times a week, chatting about mobile products or promising startups—"Just two guys hanging out who really love tech," Systrom says. Looking for another sign of Instagram's juice? Its work space, spartan except for some vintage cameras, is quite close to the company's on-site barbecue joint, prime access to good brisket being almost as critical as access to the Facebook cofounder.
In April 2012, Facebook agreed to acquire Instagram for $1 billion (although the price when the deal closed, due to Facebook's depressed share price, turned out to be closer to $700 million). Since then, Systrom's smartphone app, which lets users snap pictures, modify them with Polaroid-era filters, and share with friends, has blown up. Instagram has tripled its user base in the last year to more than 100 million. Just as important, it has set the standard for how to create a delightful app while running a lean operation. Instagram still has just 34 employees. Facebook had around 600 when it hit 100 million users. "The Instagram acquisition has been a great model for Facebook," Zuckerberg says.
Talk about an understatement. The stakes for Facebook couldn't be higher. Ever since the company filed to go public on February 1, 2012, Zuck has been dogged with questions about when Facebook will finally create a truly compelling mobile experience for its audience—and how it will make money from all those users logging in on all those devices. The questions are no longer totally fair: Mobile revenue constituted 25% of Facebook's total sales for the first quarter of this year; and the company has spent this past year avidly developing new apps such as the Facebook Home overlay for Android phones, which was introduced with great fanfare in April. But its trump card to transform itself into a "mobile first" company is Instagram, a jewel of a brand akin to Pixar within Disney. In Instagram, Facebook has a service that is adored by users and ripe with potential to generate significant mobile advertising revenue.
Instagram also addresses Facebook's worry that it is not as cool with the under-25 set as it once was. In the company's annual report to the SEC, it acknowledged, "We believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook. For example, we believe that some of our users have reduced their engagement with Facebook in favor of increased engagement with other products and services such as Instagram."
In other words, Mark Zuckerberg really needs this Instagram acquisition to work out. But rather than bigfooting Systrom, Zuck's strategy is to let him operate relatively autonomously inside Facebook. Systrom's mandate is to build out his product in an organic way that will let Instagram make money without disillusioning its adoring users. "What's misunderstood [by the public] is that Instagram is not a feature like YouTube, which at the end of the day is Google's video play, right?" explains Systrom, who has a verbal tic of asking for your immediate assent to whatever point he's just made. "Instagram should be thought of as a separate entity on a different track, yet very much aligned with the Facebook mission. The long-term value for shareholders is much, much greater." Prominent hedge-fund manager Leon Cooperman agrees, explaining his purchase of Facebook shares to CNBC in May by saying, "We think people underestimate the mobility opportunity that exists in Facebook." His belief: If Facebook can crack mobile—and Instagram is a big part of that effort—the company could end up with a market cap of $300 billion, or almost five times its current size.
If opening up a gusher of mobile revenue, turning around Facebook's stock, and keeping Facebook cool and relevant in social media seems like a lot to ask of Systrom, it is. But he's not fazed one bit. When asked about Instagram's potential, he responds without a moment's pause: "If it keeps growing at this rate, it will be the biggest thing in the world." Then, perhaps immediately understanding that such a statement implies that his outfit will outgrow Facebook itself, Systrom stops short, smiles, and adds, "Now, will we continue to grow at this rate? Different question."
Like so many modern fairy tales, Instagram's story begins in a San Francisco coffee bar—literally at a spot named Coffee Bar, a hacker mecca where the ratio of laptops to humans is approximately two to one. In late 2009, Systrom was becoming a regular (a self-proclaimed purist in almost all pursuits, he takes his coffee black). He kept running into his friend Mike Krieger, a Brazilian-born engineer whom he first met through Stanford's prestigious Mayfield Fellows Program. Systrom would tell him about the app he was working on called Burbn (pronounced like the liquor he favors—neat). By March 2010, Systrom was seeking a round of seed funding and needed a cofounder. Krieger signed on.
Systrom had designed Burbn to include almost every trendy app feature of the time, from check-ins to video sharing. "Burbn was our science experiment," Systrom told me back in February 2011, when he and I first met. "We did too much on purpose because we were trying to figure out what got people amped." The epiphany: "People loved posting photos of where they were and what they were doing and using other apps to filter them," he said. "So why don't we combine the two and cut everything else?"
Creating an app for mobile is a very different process from designing a website for stationary users. "Mobile is about constraints," says Instagram product manager Gregor Hochmuth, explaining the team's philosophy. "We had a really small screen; we didn't care about the Web; we had a really small number of engineers and no dedicated designer. Now let's make the best product." Systrom and Krieger added a set of constraints of their own. Anything they did had to be beautiful, fast, and easy to share. The team would not work on any feature that didn't address one of those three goals. "People have better things to do than fumble around with your app," Krieger notes.
Instagram went live as an iPhone app on October 6, 2010. It was downloaded 100,000 times in the first week, driven by stellar reviews lauding its speed and ease of use. While Instagram didn't invent photo sharing, no one handled iPhone photos as elegantly or intuitively. "It was so polished and simple," says Instagram's first investor, Steve Anderson of Baseline Ventures. "Total dopamine!" Competing apps tried to do too much: All too often, they acted as either a photo utility (with wonky features for camera and Photoshop nerds) or as a Web-style sharing service. Facebook's app, for one, tried to cram in all its web features. Krieger recalls seeing someone at a concert "taking a photo, and being, like, 'How do I share? Oh, I'm going to quit out and then share to Facebook now, and then I'm going to . . .' Come on! This is a waste of time."
What's more, Systrom and Krieger realized from the beginning that photos were more than just images to be shared and admired—it was really a brand-new way to communicate. "We're not a photography company," Systrom once told me. "We think about photos like, This is your tweet; this is your status update."
By February 2011, the service had 1.75 million users and had just introduced hashtags, which allowed early brand adopters like Pepsi to corral the photographic public displays of affection for such products as #Brisk and #Gatorade. Fueled by brands, media, and celebrities joining the service—Red Bull, CNN, Snoop Dogg, Justin Bieber, to name a few—Instagram picked up speed, growing at an astonishing clip of more than 1 million users a month in the second half of the year.
"Mike and I joke about the Instagram movie," says Systrom, comparing the growth of his baby to the controversial rise of his boss's startup, which inspired The Social Network. "It'd be superboring, a 30-minute Lifetime special." The only real point of tension has been about how Systrom planned to make money, a question I would press him about whenever we met over the years. "You won't see traditional forms of advertising," he told me in April 2011. "And any advertising opportunity doesn't make sense without a market leadership position." He suggested repeatedly that he would not get serious about revenue with "7 million [users], but with 70 million or 700 million," as he told me that August. He wanted any advertising to solve a problem for users. "That's the cool thing about Google AdWords," he said. The ads are often as good as or better than the content.
Quick-buck schemes abounded, but none distracted Systrom. The fervor around the service started a burgeoning economy of companies turning its treasure trove of digital images into everything from coasters to T-shirts to canvas prints. Polaroid even announced plans to roll out a physical Instagram camera in 2014. Systrom didn't want to be in the photo tchotchke game. "It's not the next $1 billion business," he said.
Instagram was crushing it with nothing more than an iPhone app and a handful of employees huddled in a cavelike San Francisco office that was warmed in the winter by $20 space heaters from Walgreens. By contrast, Facebook had wasted years and millions of dollars investing in clunky apps built on web technology, all because the company valued universal accessibility over apps that were custom-built for particular devices. Last September, Zuckerberg would call this decision "the biggest strategic mistake" in Facebook's history. But by then, he had done something to solve the problem.
The message went out to the Instagram staff—all 13 of them. Come in early, it said. On a Monday. "Did all the photos get deleted?" worried community manager Jessica Zollman. Unbeknownst to them, Systrom and Krieger had decided to accept an acquisition bid from Zuckerberg, who had offered $300 million in cash and $700 million in pre-IPO stock. Just 20 minutes before the press release would go out on April 9, 2012, Systrom told his team, "A company has offered to acquire us, and we think it's the best thing for Instagram, and we're going to do it." Josh Riedel, employee No. 3, asked the first question: "What happens to Instagram as Instagram?"
Riedel had good reason to worry. He had worked with Systrom at NextStop, a travel website that had been purchased in 2010 by Facebook and then promptly shut down; Facebook's acquisition MO has always been to buy talent, not companies. Systrom, who can be very persuasive, spent the next hour explaining why things would be different this time, why the terms of the agreement ensured that Instagram would not be folded into the mother ship. And then he took everyone to a celebratory dinner at the Cheesecake Factory—the very first splurge for Systrom, whose net worth on paper had suddenly erupted to something close to $400 million. Since then he has indulged in more than his taste for casual-dining chains—traveling to Tokyo and Paris, and reveling in his growing celebrity by showing up on red carpets, deejaying with Entourage star Adrian Grenier, getting invited to dinner by the likes of Ryan Seacrest—and posting most of it on Instagram. (He's spread it around, too, taking his team on a trip to Napa later that spring.)
But there was no real guarantee of Instagram's future. Systrom didn't own the company anymore, and Zuckerberg, he explains, really offered nothing more than "a gentleman's handshake" regarding the startup's independence. That was enough for him and for Krieger, who nonetheless acknowledges the risk they took. "You often read about ones where it was like, 'We showed up, and by week four, they changed our product development process and the company was unrecognizable,'" Krieger says. "You have to take that leap of faith, saying, 'I take Mark at his word.'"
By all accounts, Zuckerberg has kept his promise, lending Instagram his company's resources and experience while letting it maintain its own DNA and direction. He gave Systrom the option of staying in San Francisco, but Systrom chose to move to Facebook's well-appointed campus. (Bye-bye, space heaters!) Both the Facebookers and Instagrammers in attendance at an early "Zuck review" of a new Instagram feature recall with awe that he said, "Usually, I would tell a team what to do now, but you guys are in charge. So I'm going to give you my advice and you can take it or leave it."
Krieger says that Instagram has gained a huge amount of understanding in how to grow its business, as well as tremendous engineering, PR, legal, security, and spam-fighting resources. "We can come to [Facebook's engineers] and say, 'Here's a challenge we're hitting,' and they're like, 'We solved this years ago,'" he says. "We've cut out a year in terms of trial and error." That has allowed the development of enhancements that had been on the drawing board since 2010—such as Photos of You, a tagging feature—but that the small team couldn't get to because its priority was keeping Instagram running smoothly. For his part, Zuckerberg is proud that the arrangement has let Instagram's team members "stay focused on their product and scale faster than they would have if they weren't part of our team." (One exception: When Facebook's legal team altered Instagram's terms of service last December, causing a minor media freak-out about how Facebook was going to destroy Instagram's trust with its users. The changes were revoked and the firestorm quickly passed.)
While Zuckerberg boasts about how he has helped Instagram, Instagram's team is happy to describe the positive impact it has had on Facebook's mobile apps. Krieger says everyone gets to test Facebook's mobile products as they're being built and that he's been "super vocal" about giving feedback. "I'm relentless: This looks a little weird, how can we make it better? Ten minutes later, the [product manager] or engineer will walk over and be like, 'Can you show me?'" When Krieger recently checked his internal Facebook profile, he saw that he'd earned a "bug reporter badge."
A more significant sign of the potential for cross-pollination between Instagram and Facebook came when Facebook's Android team was struggling to replicate the way Instagram's app scrolls "like a piece of glass that you are flowing through," as Krieger puts it. "This was Facebook's push to rebuild mobile," says Shayne Sweeney, Instagram's first engineer hire, "and they were struggling with [the app's] performance, Mark's number-one thing for this project." Zuckerberg facilitated a meeting between the Facebook and Instagram teams, and, Sweeney recalls, "we walked into this room, and there were 10 Android engineers saying, 'Tell us how you did this.' We handed over the keys. Here's our secret. Within 48 hours, they'd solved scrolling." According to data the company shared during its first-quarter earnings announcement, Facebook now has 751 million monthly active mobile users—a 54% increase year-over-year—and 61% of them use Facebook on their phones daily.
True to his word, now that Systrom has market leadership and a critical mass of users, he is finally ready to discuss how he'll profit from peddling all that "visual crack," as he once described Instagram to me. Although the meeting spot is casual—we're chatting over a 9 a.m. Friday brunch at Zazie, a crowded spot in San Francisco's Cole Valley neighborhood, where the slabs of pancakes and bacon spill off the plate—the line of questioning, still new to Systrom, drives him toward his disciplined and serious affect, where he can sound like Data from Star Trek: The Next Generation, as opposed to the chill young preppy he resembles when he's at ease.
His opening salvo is an echo of what he's been telling me forever: "The last thing we want is to plop in banner ads." Systrom has just hired a director of business operations, Emily White, to execute the details of Instagram's plan for making money. The hire is another Facebook perk. Systrom can now focus on the product, in much the same way Zuckerberg could primarily be Facebook's chief product architect after off-loading day-to-day operations to Sheryl Sandberg. The parallels don't stop there: White, who previously ran Facebook's local and mobile partnerships, is a Sandberg protégée, having followed her over from Google. White rejects the idea that she's the "Sheryl Sandberg for Instagram." She says, "I don't think there's a Sheryl Sandberg for anything else."
Despite being a newbie, White is already protective of the Instagram experience. "If people see super spammy ads in their feeds," she says, "it's going to be destructive." She's also started parroting Systrom's belief that there's no reason the advertising can't be as luscious as the content, saying that Vogue magazine, a rich, glossy publication where that virtue is certainly evident, could be its model.
As Systrom and I eat, he picks up on this theme, revealing more about where revenue will come from than he ever has before. He asserts that brands are more than capable of producing compelling mobile advertising. "There are a lot of brands on Instagram," he says, ticking off Burberry, Nike, and Starbucks as three examples, "and it turns out that Instagram is an efficient way for them to get their messages across. We can build tools that let them do that more efficiently. That's a very big business."
Two of Instagram's brand-friendly tools are its video and Explore features. Instagram video, introduced in late June, offers advertisers the ability to create 15-second clips with audio and filters, similar to Twitter's Vine service. On the day the feature launched, brands such as Lululemon and Burberry had already jumped at the opportunity to create short bites of video for the platform. And Systrom calls Explore, the section of the app where users can discover new content creators to follow, an "untapped gold mine." Channeling his inner Anna Wintour, he envisions packaging narratives that users "can tune into anywhere at any time." The first example he cites is a curious and slightly naive one: a behind-the-curtain peek at life inside North Korea. While it's hard to see any advertiser jumping for that opportunity, it's a short hop to more brand-friendly stories such as a look at the pageantry surrounding the World Cup (cue Nike and Adidas bidding war) or behind the scenes at the Oscars. "I absolutely see that as part of Instagram's evolution," says Julie Bornstein, Sephora's chief marketing officer for digital, adding that Instagram delivers a more engaged audience than other platforms like Twitter.
Users can also take advantage of hashtagged keywords to create the equivalent of their own single-topic magazines based on what they're into. Instagram could easily start selling those words to brands, so that if you (like Systrom) have a yen for high-end shoes, J.Crew could seamlessly drop in slick images of what they just so happen to offer. It's the app analog to the U.S. magazine publishing industry, which still commands $40 billion a year in revenue.
None of these moneymaking ideas are completely novel. Instagram's peers—Twitter, Tumblr, Flipboard, BuzzFeed, and others—have all toyed with some version of them. But no one else has what Instagram offers—a singular focus on a narcotic flow of stylized imagery (and now video). No one has anybody like Systrom either. He genuinely embodies the idea of Instagram as lifestyle enhancer, a perfect loop of conspicuously consumptive lust. Find the beautiful thing on Instagram; get that beautiful thing for yourself (for Systrom, that's rare top-shelf bourbons, aviator sunglasses, and celebrity selfies); post your own photos or video of you with what you love; repeat.
While Systrom and White both swear that they are under no pressure to deliver revenue just yet, the wheels are turning. When pressed, White refuses to commit to a time frame for rolling out ad products, but eventually she says, "Just call it the next year or so."
With virtually limitless resources at his disposal, Systrom isn't in any rush to be more specific than White. Still, as Zazie's gray-haired customers slice open their mail and flip through the San Francisco Chronicle, I sense that Systrom knows he can't stay nestled in Facebook's protective bosom forever. "It's like living at home after college," he says. "There comes a time when you have to add to the pie. If Instagram is going to become what I want it to become, then it has to do that. It's gotta grow up." Right?
[Photos by Asger Carlsen]