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Facebook Bought Instagram for Good Reason (Think Amazon!)

Stocks in this article: FBAMZN

NEW YORK ( TheStreet) -- Facebook (FB) bought Instagram in a deal worth about $1 billion. Shortly thereafter, it launched its own version of the service called Camera.

Wall Street and most of the financial media met the series of moves with blank stares. A blogger for Reuters whined: Someone please explain to me why this makes sense.

TheStreet's Chris Ciaccia labeled the situation uncertain, noting that Mark Zuckerberg will have to "answer questions" about this strategy or "face some very unhappy shareholders." Earlier in the same article, Ciaccia came close to figuring out why Facebook made the seemingly curious move: Perhaps CEO Mark Zuckerberg bought Instagram because of fears that users would navigate away from the site, hurting a core part of Facebook's business.

Close, but not quite.

Facebook is using a strategy popular in, ironically, one of the sleepiest and least aggressive industries in existence -- terrestrial radio. In fact, until Pandora (P) came along and knocked radio executives out of their collective slumber, this might be the most competitive (or anti-competitive, depending on how you view these things) salvo radio companies ever tossed.

Imagine a major city with just one FM station targeting 18-to-34-year-old men with alternative music. It does well in the market, which suggests there might be room for another FM music station of the same, or similar, format that goes after the same demographic.

Instead of sitting around to wait for a competitor to flip the switch on the same type of station, the owner of the existing station changes format on another one of its properties, introducing a new station that goes after the same 18-to-34-year-old male audience. They use an alternative or rock format that is only slightly different from their other station. While the new entrant might take market share away from the old one, ratings and revenue stay within the same company instead of moving elsewhere.

Radio types would say the company that now has two stations of similar taste "blocked" competitors from making such a move. Introducing a third station that goes after the same group, particularly with the same type of format, risks oversaturating the market.

I'm surprised nobody -- at least that I know of -- has made this logical connection. It's probably because they've been too busy jumping on the now cosmopolitan bandwagon of Facebook hate.

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