The founders of Instagram are following the founder of WhatsApp in exiting Facebook which, in my opinion, is some of the best news Facebook has had in this torrid year.
Kevin Systrom and Mike Krieger are leaving Facebook as a result of increasing pressure from the social media giant to become more tightly integrated with the mothership. This issue dates back to the heady days of 2014 and 2015, when start-ups were such hot property that founders could have their cake and eat it too.
This meant that acquirers had to allow the founders of the acquired companies to continue running their companies as before, even though founders had sold all of their economic interest in, as well as control of, their creations. Failure to comply meant that the founders would simply move onto the next ecosystem that was willing to pay them the same price and give them the independence they desired.
This was why Google lost Twitch to Amazon, as Google has long recognized how crucial it is for Digital Life services to be integrated in order to realize their true value. Google refused to allow Twitch to remain independent, and so it went and sold itself to Amazon instead, which had not really understood how important integration is.
The same is now happening at Facebook. Faced with slowing growth and collapsing margins, the company can no longer afford to have these massively important assets simply chugging along doing their own thing. When revenues were growing fast and there were no clouds on the horizon, this was less of an issue. But now that times are tougher, Facebook needs to get the most from the investments it has made in Instagram and WhatsApp.
The first way to do that is to bring them in-house and make them part of Facebook such that the insights and understanding that it has of its users is deeper. This is how it can draw better insights and target users with more relevant, less intrusive advertising and charge its customers more per impression.
Pressure to perform has forced Facebook to go to its acquired companies and bring them closer together, something which the founders have fiercely resisted. This is why Facebook has seen the exit of first, the WhatsApp founder and now the founders of Instagram.
I think that this loss is actually good news for Facebook. These services have grown far beyond anything that was expected thanks to being part of Facebook, and I think that whatever value the founders brought to the table has been long since been realized.
The future of these services is for them to become integrated such that Facebook becomes a mature ecosystem in its own right. This means a consistent place where users live their Digital Lives with Facebook rather than a series of separate and fragmented services.
This integration will allow Facebook to more effectively monetize its services, and underpins a return to growth that I see coming at some point in the next three years. With the founders gone, Facebook should have a much freer hand to effect this change, meaning that their exit is badly needed.
Despite this long-term upside for Facebook, the short-term is pretty bleak with slowing growth and a 1000bp decline in operating margins on the cards. Furthermore, Facebook needs to lick its AI into shape which I have long been of the opinion is at the root of most of its problems.
Once all of this is done, then I think that there is scope for a return to steady growth and much better profitability. It is then that I would look to be involved with Facebook once again, not before.
This article was originally published at RadioFreeMobile