Instagram in the danger zone

December 19, 2012: 8:52 AM ET

With a torrent of bad press, Instagram risks the pitfall of once-hot tech companies like Netflix and Groupon.

FORTUNE -- They say that there's no such thing as "bad publicity." Instagram may be in the process of proving otherwise.

Let's recap the chain of events. Just two weeks ago, Instagram CEO Kevin Systrom announced the popular photo-sharing start-up would kill support for "Twitter cards," which ultimately meant that Instagram photos now no longer appear in user streams. Users may only post photo links to the social network like so:

Screen Shot 2012-12-18 at 4.03.54 PM

To view photos, users are rerouted to the recently-revamped Instagram.com. Instagram got plenty of flack for taking away a feature Twitter users had taken for granted.

Then came news of Systrom's testimony at a hearing of the California Corporations Department last August. When asked multiple times whether  he and his popular photo-sharing company had received other acquisition offers, Systrom said "no." According a recent report by The New York Times, he probably should have said "yes." Just weeks before Facebook (FB) announced its acquisition of Instagram, Systrom was allegedly in serious talks with Twitter to be bought out. The asking price: $525 million in cash. In the end, Facebook snagged the startup for a deal ultimately worth $735 million. Still, there remains that possibility that Systrom may have lied under oath.

MORE: Mark Zuckerberg donates $500 million

Now comes the latest bad news for Instagram. Earlier this week, Instagram made several changes to its privacy policy and terms of service. Chief among them:

To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you.

The idea that "a business or other entity may pay" Instagram for the use of user images and may do so "without any compensation to you," really struck a chord with some media and some of Instagram's 100 million-plus users. (Heck, even Mark Zuckerberg's wedding photographer weighed in.) Instaport, a tool that lets users basically download their Instagram images, reported overloaded servers Tuesday morning, arguably because some users were busy saving their photos before deleting their accounts. Systrom responded with a blog post that, depending on the perspective, innocently clarified the legalese or amounted to backpedaling.

What ever the true case may be, it's hard not to feel like Systrom and Instagram have seriously fumbled when you take all these events into account. "From the start, Instagram was created to become a business," Systrom wrote. Well, sure. That's a no-brainer. No tech startup, however well-intentioned, is a non-profit at the end of the day. But how a company goes about becoming a self-sustaining business and reaching profitability is something its users -- and obviously, the media -- pay close attention to. Certainly, that's a lesson Netflix (NFLX) learned the hard way over the last 18 months when it made mistake after mistake. For entirely different reasons, Groupon (GRPN) and LivingSocial have found themselves trapped in a spiral of negative coverage that, at the very least, makes it difficult to operate.

In other words, Instagram is seriously testing the loyalty of its users. No tech company, no matter how popular they may be in the moment, is invincible. Not even Instagram.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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