Instagram recently introduced an all-new search-and-explore tab featuring trending hashtags and trending places above the typical recommended posts people are used to seeing. Additionally, the tab features curated collections of accounts and places such as "ancient ruins" and "glimmering islands." The new features have excellent monetization potential, taking a page out of Twitter's (NYSE:TWTR) book, selling promoted hashtags and collections.
Facebook (NASDAQ:FB) is just starting to get serious about monetizing Instagram, introducing more direct-response ads and targeting capabilities earlier this month. Those tools will make the platform more accessible to small businesses and direct-response advertisers -- an area where Facebook has seen a lot of success. But Instagram has already built up strong relationships with several brands and could use the new explore tab features to build on those relationships.
That's bad news for Twitter
Despite a heavy push into direct-response and self-serve advertisements, Twitter still makes the majority of its ad revenue from direct sales to big brands. While it doesn't rely on promoted hashtags as much as it used to, the company still derives a good amount of revenue from the ad unit.
Twitter last updated investors on its promoted hashtag pricing in February 2013, when it had about 200 million active users. At the time, it was charging $200,000 per hashtag. Since then, the company has added 100 million more active users and made trending hashtags more prominent, especially on mobile. So, it's probably been able to increase the price of promoted hashtags.
With that in mind, Instagram's new explore tab could conservatively charge $300,000 or so per promoted hashtag, considering it's growing faster than Twitter and skews toward a younger audience. That would generate over $100 million in ad dollars for Facebook, a drop in the bucket for the giant social network, but about 5% of Twitter's estimated revenue for 2015.
While the amount of ad spending on mobile and social networks continues to grow, there's a good chance Instagram could take share away from Twitter if it gives brands the opportunity to advertise on its platform. That's especially true if it offers a familiar format such as promoted hashtags. Businesses don't have infinite ad budgets, and $100 million to Instagram for its new feature is $100 million not going to Twitter or some other platform.
Brand advertisers are Twitter's most important customers
As mentioned, the majority of Twitter's ad revenue comes from big brands, which stands in stark contrast to Facebook, which now touts over 2 million advertisers. Last quarter, Twitter CFO Anthony Noto mentioned that direct sales -- mostly associated with brand advertising -- accounted for the largest contribution to year-over-year revenue growth. Meanwhile, the company's self-serve ads failed to live up to expectations.
Keeping brand advertisers spending on its platform will require Twitter to show that it can continue growing its user base. Brand advertisers are interested in reaching the largest audience possible. Notably, Instagram surpassed Twitter's user base at the end of last year. While Twitter has introduced several new products aimed at reinvigorating user growth in the first six months of 2015, we won't be able to see for some time whether they've been effective.
No immediate plans from Instagram
The one piece of good news for Twitter is that Instagram hasn't shown any immediate plans to monetize the new features. But it certainly looks like the direction the new feature is heading, especially in light of recent efforts to step up advertising on the platform. More likely, Instagram will sit on the feature and collect some metrics on its use to take to potential advertisers in several months.
When it flips the switch, we could see $100 million or more of branded ad-spend wind up in the pockets of Facebook, while Twitter calls on its ad partners to stick with it.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, and Twitter. The Motley Fool owns shares of Apple, Facebook, and Twitter. 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.