Austin Carr in a retelling of the Hipstamatic story for FastCompany:
"By March of 2011, when Hipstamatic hired its new designer, Laura Polkus, Instagramhad already rocketed to 2.2 million users, and was growing by 130,000 users per week. But Polkus says the team largely ignored Instagram. “There wasn’t a whole lot of attention paid there,” says Polkus, who was later let go. “The conversation internally was, ‘Well, we’re completely different. They are a social network, and we are not. Who cares what’s going on with them? We’ll just continue to do what we do.’ But from the public’s perspective, that’s obviously not the way things were seen.”
I've seen this in many companies. I've been guilty of this stance myself. It is at the brink of competition that one resists it the most. When the world begins to compare what you're building with what someone else has built you immediately reject that idea, trying to tell anyone that brings it up that you're different or will be different or want to be different.
But the fact is, the world doesn't have time to figure out why you're different on their own. You need to show them. And in order to show them you may need to come off of your existing product roadmap and work on marketing. It isn't fun - at least not for builders. To take a break from building things in order to make sure that your messaging is right? Eeek. Gag. But that is exactly what you need to do. You need to show the world how you're different so that there isn't a question.
But some will go down in flames rather than strive to make this distinction in the marketplace. Using Hipstamatic vs. Instagram as the lens for this argument you can see how the world viewed the two applications in general terms; a camera app that lets you add filters to your photos and share them with friends. Instagram won because it was free, was much easier to use, and had a social network built into the app and didn't rely on using a social network you've built elsewhere.
So, one could say that Hipstamatic lost to Instagram. But that is because they were playing the wrong game. (And, if you read the FastCompany article you can see they spent rather lavishly and had very little regard for running a good business.)
If you back up a little and look at this same argument using App.net vs. Twitter as your lens you can see this same situation happening in reverse. Twitter; free, easy. App.net; costs money, is seemingly the same service. But there is a catch; App.net doesn't need to "beat Twitter" to be a success. Hipstamatic didn't need to beat Instagram to be a success. They just needed to clearly define the differences between the applications and aim to be a great, paid alternative.
I don't pretend to know what the differentiators should have been between Hipstamatic and Instagram but I can say that not being owned by Facebook would have been an excellent start.