Ever since Instagram rolled out its Stories feature a couple years ago, Snap (NYSE:SNAP) has seen an impact on Snapchat user growth. But it's not just users that prefer Instagram Stories over Snap's -- it's advertisers, too. Ninety percent of marketers prefer advertising on Instagram Stories instead of Snapchat Stories, according to a recent survey from Cowen. That's actually a slight improvement from the beginning of the year.
More importantly, nearly half of all marketers in the survey said they spent less than anticipated on Snapchat ads during the first half of the year. Instagram, meanwhile, saw its spending intentions increase overall among the marketers surveyed.
With 1 billion total monthly users on Instagram, twice as many using Instagram Stories on a daily basis compared to Snapchat, and the power of Facebook (NASDAQ:FB) behind it, Instagram probably isn't done putting pressure on Snap's revenue.
Stories ads are just getting started
Stories ads are a relatively new format for marketers. Snapchat's only been doing it for two years, and Instagram started offering ads in Stories last March. On Facebook's fourth-quarter earnings call earlier this year, COO Sheryl Sandberg described ads in Stories as "a small but quickly growing part of our revenue."
With Instagram's strong user growth and the relatively low ad load in Stories, there's still a lot of room for Facebook to grow its ad inventory. That's important, as marketers might prefer Instagram for its superior content and targeting capabilities, but will opt for competitors if prices climb too quickly.
Instagram has historically seen between 60% and 67% of its users log into the app daily. That implies over 200 million users are logging into the app, but not clicking on Stories, every day. That's low-hanging fruit for Facebook to convert into additional Stories users. So Instagram can avoid increasing ad load for now if it can encourage more users to click on Stories. It's already taken additional steps to do so, displaying friends' Stories in the middle of the regular feed.
Instagram being in the early stages for ads within Stories is bad news for Snap, which has struggled with engagement in the first half of the year following a botched redesign of the Snapchat app. As long as Instagram continues to expand its ad inventory, that means the preference for Instagram will continue to pressure Snap's top-line growth.
What can Snap do?
Snap isn't going to overcome Instagram's advantages anytime soon. Its best course of action is to do what management says is its only option in a market where products are distributed quickly and freely: innovate.
To that end, Snap has an advantage in augmented reality capabilities, and it's reportedly using it to create visual search capabilities within Snapchat. The new feature would enable users to shop for items they see in the real world simply by pointing their smartphone camera at them. That could potentially enable Snap to do to Instagram what Instagram did to it. Instagram is notably frequently used for shopping.
A visual search product could reinvigorate engagement and open new marketing opportunities for Snap. It's certainly one of the more promising products in Snap's pipeline, as it has real potential to differentiate the company's app from Facebook and other social apps.
But until Snap finds a way to truly differentiate its products -- both consumer-facing and marketer-facing -- it will likely continue to suffer at the hands of Instagram and Facebook.