Instagram introduced video ads last week in an effort to monetize its 250 million-plus users who average a whopping 21 minutes per day using the platform. Instagram users are more engaged than ever, and its user numbers are growing, but Facebook (NASDAQ:FB) is having trouble recouping the $1 billion it spent on the photo sharing app.
The new video ads are an effort to increase the average ad price on the platform, but Instagram suffers from a few problems that make it hard to monetize. The new video ads aren't going to solve them.
I literally just saw this on TV
One of the biggest problems with Instagram's first round of video ads is that they lack consistency with the rest of Instagram. In fact, at least two of the ads ( for Disney's Big Hero 6 and Activision's Call of Duty Advanced Warfare) are repurposed from television spots. While these spots might work for platforms like Hulu or YouTube, which are more like TV, they don't fit in with the rest of users' Instagram feeds.
These 15-second autoplay ads are easily recognized, and users can elect to scroll past them. With Instagram's photo ads, they at least blended in with the rest of the feed, making users more likely to read the caption and learn more about the advertiser.
The more recognizable an ad, the easier it becomes for users to skip it. If users are skipping video ads, they won't convert very well. And low conversions means lower prices.
Omnicom Group (NYSE:OMC) may have seen the potential for sticking points back in March when it negotiated a volume ad inventory purchase that included first-window rights to new Instagram ad products. The deal was initially pegged at $100 million, then $50 million, before sources claimed it was actually closer to $40 million.
Recognizable ads aren't the only thing holding back Instagram's monetization efforts, though. In fact, most ads on Facebook's flagship platform are easily recognized as ads.
Instagram doesn't work like Facebook
On Facebook, users expect their friends to share content and information from third-party sources. When an advertisement pops up, it's just another form of content the user may be interested in -- just like all of the content from his friends.
On Instagram, most users share first-party content -- i.e., their own creations. So when an advertisement pops up from a third party, it's off-putting. (If you've ever read the comments on an Instagram ad, the evidence is quite clear.)
Several technical problems could also contribute to lower performing ads on Instagram. Most notably, Instagram doesn't allow users to add weblinks to posts. Unlike Facebook, which lets advertisers link to their product in the ad, Instagram advertisements are more like billboards or TV spots. That is, you're paying for eyeballs, not engagement.
Additionally, targeting users on Instagram is still very basic. Advertisers are able to target based on gender, age, and country. That's it.
Facebook can overcome that issue in the future by integrating its targeting technology with Instagram. It's actually surprising that it hasn't yet done so, but big brands might be spending so much that accurate targeting is insignificant.
Finding what works on Instagram
Investors shouldn't dismiss video ads on Instagram as a categorical failure. In fact, Banana Republic's advertisement -- a timelapse video of a designer sketching a model -- is an excellent demonstration of an interesting ad that fits into Instagram's platform.
It should come as no surprise that users who actively follow brands on Instagram are more likely to convert into sales. Last year, traffic sent to e-commerce sites from Instagram converted better than Twitter, and at twice the rate of Pinterest, according to data from Shopify.
So, what works for brands on Instagram is offering users an experience they can't get anywhere else, which encourages them to follow the brand. Repurposed television spots aren't going to cut it.
Instagram needs to work with brands to create advertisements that can convert people into followers, and offer analytics that show the long-term effect of advertising. This will be tough to do on a large scale, but going after the big fish first -- like Omnicom Group -- looks like the right approach. Still, investors shouldn't expect a big revenue stream from Instagram anytime soon.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard, Facebook, Twitter, and Walt Disney. The Motley Fool owns shares of Activision Blizzard, Facebook, Twitter, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.