Instagram: A Growing Problem

Instagram has turned into a powerhouse in the social media front. They have over 150 million monthly active users, a significant accomplishment from the approximately 22 million they had before Facebook (NASDAQ: FB  ) acquired them last year .

In a teen survey conducted by Piper Jaffray, 23% said Facebook-owned Instagram was their No. 1 choice. Investors may view this as a positive, with recent news from Facebook that they have been losing some of their teen appeal. But I do not: Instagram is currently a problem for Facebook because they have not yet monetized their platform, and are taking users away from Facebook.

A failed attempt to make money
The backlash over Instagram's first attempt to make money was monstrous. Instagram changed their terms of service, giving them the power to sell the username, likeness, and photos of any Instagram user. Instagram would then be able to sell these items to any business or entity without any compensation for the user it was taken from. Users were horrified, fearing they might one day end up on a billboard without their permission. Needless to say, Instagram reversed course on their new policy almost immediately after public disapproval.

Another change Instagram attempted to make to their terms of use involved the ability to show ads in a user's feed without telling them it was an ad. This was also removed. A social-media site has a tough balancing act balancing ad monetization with the desires of the end user. In this case, users only want to see posts from people they follow and do not want ads shown without knowing it is an ad. Although, if users want a service bad enough they are willing to deal with occasional ads.  

The Super Bowl is a great example: These days people like to record the shows they watch so they can watch them without commercials. The Super Bowl, on the other hand, is an advertising bonanza because people want to be watching it in real time. This has lead to it being one of the biggest advertising money-makers, and where many companies debut their best ads.    

Ads are commonplace on Twitter (NYSE: TWTR  ) and Facebook feeds, but have not yet made an appearance in the feeds of Instagram users. I know Facebook doesn't want to ruffle any more feathers, but they need to start making money off of the 150 million active users on Instagram. Users are not going to leave to another photo-sharing service because there isn't one with the same user base.              

Taking users away from Facebook
When posting a photo to Instagram, users have a choice to post the picture to Facebook as well. Users choose to do this for a couple reasons: If their picture is liked on Facebook this can transfer directly to a "like" on Instagram. Furthermore a Instagram user might not want to bother uploading the picture to Facebook as well. The problem for Facebook is this doesn't work vice versa. Facebook users cannot post pictures to Instagram, and Instagram "likes" don't transfer to Facebook "likes."

So, as an investor, the big question is why does Facebook push users away from a monetized platform to a un-monetized one? Yes, they have been able to significantly raise the number of users on Instagram, but they are hurting themselves in both the profit and revenue departments. What started off as a marketing push is currently hurting the company's pockets.

On the positive side, when posting a photo to Instagram users also have the option to "tweet" it. The difference is, it simply shows up as a caption and link inside the Twitter feed. Users must click on the link (which takes them to the Instagram website or app) to view the picture.

Twitter has recently changed their feed to have pictures show automatically, a significant change from before when users had to click on a link to load pictures. Twitter would like to incorporate more photo-sharing into their feed as the field continues to grow, but still remains far behind Facebook and Instagram.            

Foolish conclusion
The growth of Instagram has been phenomenal for Facebook. It is one of my favorite apps  and has became more popular with my peers. Although I don't enjoy advertisements (who does?), adding the occasional quality picture from different companies into my news feed would not effect my use of Instagram. Facebook needs to start monetizing Instagram and its users to capitalize on its growing user base, and provide another stream of revenue to the company.

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