Instagram, started by two friends, Mike Krieger and Kevin Systrom, less than two years ago, has just been acquired by Facebook for nearly $1B in cash and stock. Such stratospheric valuation is absolutely mind boggling. Microsoft style mind-boggling.

Don’t get me wrong. Instagram is a great photo-sharing app and its popularity (~30 million users) would be a valuable acquisition to a company seeking to gain a large online community of users. But Facebook probably already has 99.9% of Instagram users. While that’s great for integration, there’s no inherent value play (i.e. this will make us money). That’s a problem for a company about to go public under the scrutiny of shareholders with extremely high expectations for the company.

Mark Zuckerberg viewed Instagram’s wild success as an easy-to-use mobile photo-sharing application as a fundamental threat. The acquisition strategically makes sense. Photo sharing is a fundamental component of online interaction. Photo sharing on FB mobile sucks. It sucks bad. So, the conundrum — build a better app in-house (the Apple way) or just throw an inordinate amount of cash (the Microsoft way) at the problem. Only time will tell if this move was brilliant or brain dead. I guess that depends on how much ad revenue Facebook will be able to extract out of it inevitable “integration” of the application.

If I was a top engineer at FB, I’d be rather insulted that my CEO didn’t have faith in his own company to build a better solution (given the hoards of cash they obviously could’ve thrown at the problem). And if I’m an Instagram junkie, I’d be very worried my beloved application will go the destiny of FLICKr, assimilated into mediocrity by a company that sucked the original magic dry.

Read Zuckerberg’s Facebook message and Instragram’s blog post.