How might Instagram have generated profitable levels of revenue, and more importantly, would it be able to do so at a scale that would give its investors a suitably significant return on what they put into it?
Instagram could have charged $2.99 for the app, or sold new filters through in-app purchase, and it would have made very good money for a team of two or three people.
But by staying free, user growth exploded so much that they scared the crap out of Facebook and got bought for a billion dollars after just two years.
That wouldn’t have happened if they took a more traditional route to funding, since the userbase would probably have grown more slowly. And even with their free service, their ad-based monetization plans sounded like something that we would have hated much more than the Facebook acquisition.
So it’s hard to argue with their choices in retrospect.