Shades of “Embrace & Extend”, Bundling, & Instagram Stories

by Jason Costa

One thing that’s consistently impressive about Facebook is their constant awareness of the competition, and their ability to see where market trends are going. Once Facebook identifies what they believe to be a market trend, they tend to embrace their competitor’s product approach and extend that within their own products.

Facebook has been doing this for some time, with mixed success: Facebook’s Q&A as a means to take on Quora, Facebook Places to take on Foursquare, etc. This extends to feature sets within Facebook proper as well: supporting animated gifs and silent auto play to tackle Tumblr, and redesigning the Newsfeed to enable realtime updates in a bid to stave off Twitter. And when they can’t win outright by building in house, they buy (Instagram, WhatsApp).

Recently, Facebook’s Instagram product launched Stories as a direct competitor to Snapchat, cloning much of the latter’s functionality. Given Facebook’s reach, they’ll be able to apply the social graph and drive massive distribution of this new Stories product. This could certainly slow Snapchat’s growth as it gives non-millennials a meaningful reason not to try out Snapchat. So what will all of this mean for Snapchat longer term? We’ll get to that later on in the post.

Instagram Stories

Facebook’s strategy with Instagram is reminiscent of an old Microsoft Strategy, referred to as “Embrace & Extend”, which Microsoft used to great effect against the likes of Lotus, WordPerfect, and Netscape. Microsoft embraced a competitor’s software by effectively cloning it with a compatible version, which allows users to import and export their content from the original 3rd party apps. Then, MS extended their own software to include additional closed features supported only in their version — forking “compatibility”. Microsoft also bundled their own app with Windows, giving new users a reason not to use a 3rd party application.

Shades of Embrace & Extend, Bundling

With Stories, Instagram isn’t embracing a standard so much as a medium. Instagram is commoditizing the format of short-form videos that Snapchat pioneered. Additionally, unlike apps such as Lotus 1–2–3 and WordPerfect, there’s little investment on behalf of the Snapchat user; they don’t “save” any files there because Snapchat is ephemeral. This means that the switching costs are lower. Snapchat is trying to address this with Memories.

Instagram has already bundled Stories within the parent app, making it readily accessible from the homescreen for their 300M+ DAUs (sound familiar? MS used to do the same with Internet Explorer on Windows, removing Netscape’s air supply). One shouldn’t be surprised when we start to see Stories show up in some kind of auto play format within the native Instagram feed itself, and later distributed directly into the FB newsfeed. Facebook’s constellation of apps is a tremendous distribution lever, eerily reminiscent of Windows.

Where things will get interesting is how Instagram extends and differentiates the medium; one has to imagine that courting publishers for exclusive, high quality content available only on Instagram will be an important next front in this battle. With the might of Facebook’s massive partnerships org behind it, Instagram will be able to crank hard on live, local, national, and international video deals. And it makes sense for content creators — the massive audience is already there, and the network is built in right out of the gate. The threat that Instagram poses to Snapchat’s Discover tab in particular is very real.

Will Instagram Stories extinguish Snapchat?

As noted earlier, while it may meaningfully slow growth down for Snapchat, there’s no reason to think that Snapchat’s massively engaged and younger userbase is going to jump ship for Instagram Stories anytime soon. One thing that Snapchat has going for it is that it’s cool: the same way Facebook was once cool during the reign of MySpace. Non-millennials not joining the service in large droves actually helps Snapchat retain that element of cool.

I suspect that for Facebook and Instagram, this game will play out much closer to how things went for Microsoft in the second phase of the browser wars circa 2010/11 — where several players (most notably Firefox and later Chrome) shared the market. In fact, Chrome eventually overtook the browser market based on strength of product — Snapchat will need to do this same thing. There’s no reason to think that they can’t do it either, as Snapchat has continued to radically evolve their product from single image messages to include filters and lenses, QR codes, short form video messages, the Discover tab, and more. There’s potentially even AR hardware coming down the line.

Snapchat is making aggressive bets and that’s what it will take to be a market leader. The team there needs to continue moving fast and evolving the product. Their momentum is truly impressive, with most recent figures indicating that their 150M+ DAUs are consuming 10B video views a day, and perhaps even more impressive: a third of those users are creating content. Snapchat maintains pole position for the future of mobile storytelling, at least for now; but I’d be keeping a very close on eye on Instagram Stories if I were sitting in the Venice office.


Jason Costa is currently an EIR at GGV Capital. This entry will be the first in a series of posts aimed at exploring topics such as consumer product development, platform analysis, and strategy.