Instagram's ad business has exploded over the last five years. By one estimate, the photo-sharing app generated $9 billion in revenue for parent company Facebook (META -1.76%) last year. That's more than Twitter, Snap (SNAP -3.17%), and Pinterest combined.
A key to Instagram's success is its ties to Facebook's ad buying platform. Marketers use the same ad-buying tool to buy ads across Facebook and Instagram, meaning they simply have to check a box in the ads manager if they want their ads to appear in Instagram. This integration has played a key role in helping Instagram grow the total number of advertisers on its platform. eMarketer estimates 69% of marketers use Instagram compared to just 28% on Snapchat.
But amid all of the turmoil surrounding Facebook, advertisers are shifting portions of their ad budgets away from the massive social network. That's not to say their Facebook ad budgets aren't increasing, they're just not increasing as much as other digital ad platforms. But if marketers aren't using Facebook's advertising tools as much, that could negatively impact Instagram's ad business as well, eMarketer notes.
Advertisers follow returns
The most important thing for advertisers is maximizing their return on investment. How many sales can they get per advertising dollar?
The reason many marketers plan to spend a smaller portion of their budget on Facebook's core platform is explained by declining marginal returns on investment. It shouldn't be a major surprise to investors that have followed the company for the last couple of years.
There's no more room to increase ad impressions in Facebook's news feed. As a result, average ad prices for news feed ads have skyrocketed over the last couple of years. Couple that with a user base that's becoming less engaged overall, and marketers are going to see lower returns on their ad dollars.
What's changed at Instagram?
Instagram is still an excellent opportunity to generate superior return on investment. The app is growing its user base rapidly: Monthly active users climbed to 1 billion last summer, up from 800 million in September 2017.
More U.S. teens -- a valuable demographic to marketers -- use Instagram than Snapchat now, and the gap between the two for the most-preferred social media app among teens is closing as well. 61% of marketers consider Instagram the best way to reach Americans between 13 and 34, according to a recent Cowen survey.
Just because marketers are spending a smaller portion of their budgets on Facebook ads, it shouldn't affect their demand for Instagram ads. In Facebook's ad-buying tool, it's basically just another checkbox marketers have to tick if they only want ads to show up on Instagram. Nothing much changes.
Facebook's advertising transition
Investors will be listening and looking for commentary on Instagram's ad business throughout 2019. In particular, investors will want to see commentary on Stories ads.
Facebook's management noted its ads business is transitioning from ads in News Feed to ads in Stories. News Feed ads are well monetized, and marketers know how to maximize their value. Stories ads are still new, and neither Facebook nor marketers have quite figured out how to make them as effective as News Feed ads. As a result, marketers aren't willing to pay as much for Stories ads as News Feed ads...yet.
Instagram Stories is currently Facebook's biggest opportunity for Stories ads. The feature has 400 million daily active users, and it's highly concentrated among teens in the United States. Other Facebook Stories products are more global.
Facebook's fourth-quarter financial report at the end of the month will be investors' next glimpse at the transition to more Instagram and Stories ads. Look for modest growth in average ad price, outpaced by growth in ad impressions -- a pattern Facebook exhibited in its transition to News Feed and mobile ads. Hopefully management is forthcoming with details about Instagram's ad business or particulars about Stories ads.
Check out the latest Facebook earnings call transcript.