How Big Will Instagram Ads Be for Facebook?

Instagram is poised to overtake Twitter, but it's only one part of the Facebook money-making family.

Adam Levy
Adam Levy
Aug 14, 2015 at 9:00AM
Technology and Telecom

Source: Instagram.

At the end of last year, Citigroup valued Instagram at $35 billion. For reference, that's more than Twitter's (NYSE:TWTR) current market cap around $25 billion, and significantly more the $1 billion Facebook (NASDAQ:FB) paid for it in 2012.

But Instagram is finally showing that it's worth that high valuation. It surpassed Twitter's active user count at the end of last year, getting to 300 million active users just before the real-time information network. Earlier this year, the company introduced new direct-response ad formats that it's already begun testing in certain markets. Over the next few years, eMarketer sees these new ad formats, combined with Instagram's existing brand advertising, leading to higher mobile display ad revenue than Twitter.

Ad revenue is about to explode
eMarketer predicts Instagram will more than quadruple its ad revenue over the next two years, going from $595 million in revenue this year to $2.81 billion in 2017. Comparatively, Twitter generated approximately $1.26 billion in mobile ad revenue over the last 12 months.

eMarketer expects Twitter to bring in about $1.2 billion in mobile revenue in the U.S. this year, with international making up another $600 million or so. About 95% of Instagram's revenue is concentrated in the U.S., according to eMarketer. But as Instagram grows, it expects a larger percentage to come from international markets.

Instagram currently has about 65 million American users, in line with Twitter's domestic user base. However, Twitter's growth has slowed significantly, especially in the United States. Over the last year, Twitter has added just 2 million net active users in the country. Meanwhile, eMarketer expects Instagram's user base to soar past 100 million users by 2019. As a result, it sees Instagram's mobile display ad revenue in the U.S. surpassing Twitter's within the next two years.

Can Instagram really make that much?
The idea that Instagram will eventually generate more ad revenue than Twitter shouldn't be too much of a surprise. The network's average user's age skews younger than Twitter's, which is more valuable for most advertisers -- especially brands. Additionally, Instagram's social network provides more valuable insights on most users than Twitter -- even better than Facebook in some cases. Finally, Instagram will integrate its ad inventory with Facebook's ad-buying platform, opening up its inventory to the 2 million active advertisers on Facebook.

With all of these things working in Instagram's favor, Instagram certainly has the capabilities to attract significant amounts of ad spend from big brands and small businesses alike. The actual results will hinge on management's ability to execute.

Still only a tiny portion of Facebook
Despite the huge growth expected in Instagram ad revenue, the company is expected to only account for just over 10% of Facebook's total ad revenue in 2017. Analysts expect Facebook to generate $17 billion in revenue this year and $23 billion next year. $28 billion is well within range for Facebook, especially considering the expected growth in Instagram ads.

Instagram is just one avenue of growth for Facebook. Facebook's efforts to monetize Messenger are starting to take shape, and it's well on its way to 1 billion WhatsApp users, which could start generating significant revenue for the company within the next couple of years. Additionally, Facebook plans to start selling the first retail version of its Oculus Rift VR headset in the first quarter of 2016, adding another revenue stream to the mix. And of course, Facebook's flagship advertising platform still has room to grow with video and the growing Facebook network.

So, in the grand scheme of things, Instagram may be Facebook's most valuable subsidiary at this point. But Facebook has grown so large that even a unit growing as quickly as the photo-sharing network will still make up just a small percentage of Facebook's business.