Here's How Much Instagram Ads Could Be Worth

Last week, Michael Kors kicked off the historic start to Instagram advertisements, which aims to deliver magazine-quality advertisements to users' feeds, much in the way ads are placed within Facebook's (NASDAQ: FB  ) News Feed.


The very first Instagram advertisement. Source: Michael Kors' Instagram page.

Although Instagram remains an important asset to Facebook as far as engagement and relevancy are concerned, at current run rates its base of 150 million monthly active users won't be nearly large enough to have a big impact on Facebook's overall business.

Crunching the numbers
For its most recent quarter, Facebook reported that 49% of its advertising revenue now comes from mobile advertising, which translated to a cool $881 million in revenue. Considering Facebook closed the quarter with 874 million mobile monthly active users, or mobile MAUs, the company's average revenue per mobile MAU broke down to $1.01 during the period. Assuming it's going to take some time for Instagram to achieve similar results, I've laid out a few possible scenarios of how much Instagram could ultimately benefit Facebook's full-year results, based on its current user base of 150 million MAUs.

Quarterly Revenue Per User (150 Million MAUs)

Annual Revenue

Percentage of Facebook's 2014 Expected Revenues

$0.25

$150 Million

1.50%

$0.50

$300 Million

2.90%

$0.75

$450 Million

4.40%

$1.01

$606 Million

5.90%

Source: Author's calculations.

In 2014, analysts are expecting Facebook to grow its full-year revenue by nearly 36% over 2013 results to $10.33 billion. More than likely, Facebook is going to have to find other ways to grow its revenue outside of monetizing Instagram, assuming Instagram doesn't experience absurd levels of active user growth in the interim.

Staying tactful
By now, it's been widely reported that Facebook will begin displaying video ads along the lines of TV-style commercials within its News Feed, in hopes to generate somewhere between $1 million to $2.5 million per day, per ad, for a maximum of four daily ad slots. Assuming the midpoint of $1.75 million per day, per ad, it could mean upward of $2.5 billion a year in new revenue for the company, or nearly 25% of its 2014 expected full-year revenue. But before Facebook can hit its stride and true potential here, the company has to be absolutely certain the experience doesn't create significant user backlash or fallout.

According to AllThingsD, Facebook's video ads have been pushed back until sometime next year, to better ensure it doesn't detract from user engagement. Until then, the company will continue testing how select users react to videos that automatically start playing within their mobile News Feeds. In current form, the test automatically plays user-uploaded videos within another user's News Feed without sound, and the viewer will only hear sound if they click on the playing video.

The bigger picture
Lately, there's been much debate about the stickiness of Facebook's platform, particularly among younger users. When Facebook reported a decline in daily usage among younger teens in the U.S. just last week, investors panicked and erased $18 billion in post-earnings gains. This speaks to the reality that Facebook needs future generations on board in order to thrive over the long term.

Taking into account Instagram's current size and expected run rate, Facebook's purchase of Instagram was likely more of a play to stay relevant among younger users than it was about generating huge piles of cash. By staying relevant, Facebook can still gain insights into these demographics, which could ultimately help the company improve its marketing effectiveness and long-term adaptability. At the end of the day, Instagram could prove to be more valuable to Facebook than just dollars and cents.

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