At $89 per share as of this writing, Facebook (NASDAQ:FB) is doing just fine despite investors' yearlong clamoring for the social-media giant take the wraps off its popular Instagram property. It has been over three years since Facebook spent $1 billion for the photo-sharing site and its estimated 50 million monthly average users, or MAUs. That price tag raised a few eyebrows, but with over 300 million MAUs to date it could prove to be a steal.
Instagram hasn't been idle when it comes to ad revenue, but Facebook CEO Mark Zuckerberg opted to test ads with a few big brand names first rather than quickly instituting a full-scale monetization effort. The time has come to jump-start Instagram as a legitimate revenue enhancer, and Facebook shareholders could begin enjoying the fruits of those advertising labors before the end of the year. Instagram also isn't neglecting the user experience, introducing enhancements that could improve its already impressive engagement levels.
What's the big deal?
The reason analysts and investors have been calling for Facebook to truly monetize Instagram -- Zuckerberg has been asked about it on virtually every earnings call since the acquisition -- is the obvious revenue potential. Estimates vary, as they always do, but virtually every industry pundit expects Instagram will add significant, ancillary revenue to Facebook's top line.
One of the more conservative forecasts is Instagram will generate nearly $6 billion in annual revenue by 2020; not a bad return on Facebook's $1 billion investment. That could prove to be on the low end, considering one investment firm projects as much as $1.3 billion to $2.1 billion in revenue this year, depending on when Instagram spots are fully operational. Another industry estimate is for over $2.5 billion in Instagram ad sales in 2015.
Setting the table
Much of the recent talk surrounding Instagram is about ads, but the service is not taking its eyes off the user experience ball in the interim. Instagram just unveiled a couple new features that could make its strong user engagement -- the average is up to 10 times higher than Facebook, and it's no slouch -- even more impressive.
The Explore page has been redesigned, and will now automatically "rank" photos, events, and conversations based on trends. The objective is to make the process of following what's "hot" virtually effortless. Instagram users can set trending Tags and Places to ensure the Explore page is updated to specific events and photos of interest.
Instagram has also tweaked its Search algorithm to enhance both its Places and Top search functions -- instantly returning pertinent results for the best seafood restaurant across town, or on the other side of the globe, as an example. More information about the two new Instagram features can be found here.
The ad plan
The majority of Instagram's early advertisers were large brand names: not surprising given its "testing" stage. That could prove to be doubly important, however, as Instagram may address a concern Facebook COO Sheryl Sandberg expressed during last quarter's earnings call: the dearth of brand-name marketing partners on Facebook. If the big marketing boys aren't enamored with Facebook, the doors are open to an alternative that works great for all parties involved: advertisers get their platform of choice, and Facebook reaps the rewards.
The process for marketers to advertise on Instagram should be relatively smooth, in that Facebook has essentially made its existing ad-buying and targeting tools available to post a spot on the photo-sharing site to a targeted subgroup of its 300 million MAUs. Targeting is based on age, interest as measured by past use, and gender, among a host of other user demographic particulars.
Additionally, Instagram's new advertising alternatives will test spots that include a link to buy an advertised product directly, without losing their "spot" on Instagram. Naturally, concerns about spoiling the user experience have arisen -- just as they did with Facebook -- but give Zuckerberg some credit: He's been down this road before, and its why he's taken so long to tap into Instagram in the first place; to ensure it's done right.
With the ad-buying process in place and additional "buy" functionality coming, Instagram is primed to take off. As its recent enhancements have made clear, monetization doesn't have to come at the expense of the user experience; you can bet Zuckerberg will make certain of that. Ready. Set. Go!
Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. 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.
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