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Kodak Doesn't Profit as Facebook Bets a Billion on Photo Sharing

NEW YORK ( TheStreet) -- Facebook could have bought a photo sharing site on the cheap.

Instead, the social network flexed its pre-IPO financial muscle in a $1 billion acquisition of photo-sharing app Instagram.

The bargain photo sharing deal went to Shutterfly (SFLY - Get Report), which on Wednesday said a $23.8 million bid it made in March for Kodak Gallery, the pioneering photo sharing service from the bankrupt camera inventor Eastman Kodak, was the winning bid. There were no competing offers.

The divergence in the valuation of Kodak Gallery, an established and profitable business, and Instagram, a two-year old company with no revenue, shows that in some Silicon Valley circles, growth potential trumps the financial performance of a proven business model.

While Kodak Gallery is a photo storage and album-creating site with 75 million users and iPhone and Android-apps that connect to Facebook, it was Instagram's smaller, but fast-growing mobile app-oriented social network that Mark Zuckerberg targeted in a deal that was roughly 42 times more expensive.

Amid Facebook's rise and Kodak's collapse, the lack of interest in Kodak Gallery may also signal just how specific M&A needs are as social networking giants and Silicon Valley titans work to follow consumers into mobile products and round out user experiences.

For Shutterfly, Kodak Gallery may bolster its photo sharing capabilities in an opportunistic move that wards off prospective competitors such as Apple (AAPL - Get Report), and social networks threatening its profit margins.

In March, many analysts considered Shutterfly's bid for the customer accounts of Kodak Gallery to be a turning point for the company's profitability and pricing power, while thwarting the likes of Apple and Amazon (AMZN - Get Report) from entering the photo sharing market. Although the move pushed the company's shares up over 16% to $31.36 on March 2, Facebook's April 9 deal for Instagram led to a drop in Shutterfly's stock as some investors saw an increasing challenge to its business and Kodak Gallery bid.

Instead, the lack of competition during Kodak Gallery's bankruptcy auction and an over 5% Tuesday rally in Shutterfly's shares to nearly $31 may speak volumes about what Silicon Valley leaders like Facebook are looking for in acquisitions. After announcing the $1 billion Instagram deal, reports indicated that Facebook CEO Mark Zuckerberg brokered the move in the matter of days after watching the network's quick adoption on Google's (GOOG - Get Report) Android mobile platform, adding to its 15 million iPhone users.

When making his biggest acquisition ever, Zuckerberg said that Instagram and Facebook combined will, "offer the best experiences for sharing beautiful mobile photos with people based on your interests." It's those needs, over bread and butter revenue and profit that may be the big surprise in the diverging prices of Kodak Gallery and Instagram.

Nevertheless, Shutterfly isn't likely to fret over the valuation analysis of Facebook.

"Our acquisition of Kodak Gallery is a perfect example of the consolidation that we believe will play an important role in helping Shutterfly solidify our leadership position in the social expression and personal publishing category," said Shutterfly CEO Jeffrey Housenbold in a statement.

Kodak Gallery lets users store and share their digital images, customize photobooks, cards and albums -- meshing strongly with Shutterfly's photobook, cards and photo sharing businesses.
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