Consider this unlikely snapshot: A recent startup with less than a dozen employees distributes a free app that allows consumers to retouch photos on their mobile phones and share them easily with others on social network platforms. The company has no real revenue stream, but the app has 30 million users and the firm was valued at $20 million last year during a venture capital funding round. Enter Facebook, which offers the startup — Instagram — $1 billion as a purchase price.

The decision to acquire Instagram did not come out of the blue, since “one of Facebook’s key values is helping people share pictures with friends and family,” notes Wharton operations and information management professor Kartik Hosanagar. “What surprised me is the price.”

What does Facebook get for a billion dollars? According to Hosanagar, in addition to taking out a potentially big competitor in photo sharing, the company will gain “a firm hold in the mobile environment where it is more vulnerable” — and was therefore probably more willing to pay a high cost now “rather than later when the cost could be even higher.” Wharton operations and information management professor Eric Clemons adds that “Facebook needed some of Instagram’s functionality, and Instagram is worth much more to Facebook than it is alone. It makes sense for Facebook to add this capability. It is probably worth hundreds of millions to [them].”

“Clearly, Facebook as well as the Instagram founders felt that the market opportunity was big,” Hosanagar says. “At the end of the day, Instagram’s bankers and management did a great job, and I suspect that they probably created a nice bidding war for [the company].” Still, he views Instagram as “a novelty today. For me, it was unclear how long it would last and how it would be monetized. So I feel the price was just too high.”

Clemons points out that although the price may seem high, Facebook paid much less than it appears. “A lot of the purchase price is paid for in equity, and this purchase helps ‘substantiate’ the rather inflated share price that Facebook is trying to claim before its IPO. If it were really paying $1 billion, the deal would make no sense. Facebook would simply have developed the code themselves.”

Instagram is one of many apps that allow for creative alteration and sharing of images. So what sets it apart? Simplicity is one element: It enables users to apply instant filters to accomplish effects that would take considerably more effort using other programs. “The product is unique,” Hosanagar says. “Lots of consumers take pictures on their mobile devices, but the share rate for those pictures was low because these pictures … looked mundane. Instagram changed that by making these pictures novel and a better candidate for sharing. They addressed the [fact] that people like to share pictures of where they are, but want to share something that looks worthy of sharing.”

“Increasingly, young Facebook users are blurring the distinction between a real camera and an iPhone camera,” Clemons notes. “If you shoot with a digital SLR, you process your photos in photoshop before you upload to Facebook. But if you shoot with an iPhone and upload directly, then you can’t do any processing. Instagram lets you process your photos, and Facebook is a logical owner.

“Google+ will certainly match” what Instagram does for Facebook, he adds. “And at a cost of $995,000,000 less. They will simply code something up themselves.”