Examples of Instagram's new ad formats. Source: Instagram.
Just a month after opening its ads API to partners and supporting self-serve ads, Instagram is ready to expand its ad business. The Facebook (FB +0.29%) company announced plans to expand its ad program from eight countries to 38, making them available to nearly all of its 300 million-plus active users.
This is an excellent sign that early results are strong and the response from businesses and consumers has been positive. The move may also accelerate the timeline for Instagram to reach its full revenue potential, which analysts previously said could reach $4 billion 2020.
What should investors expect from Instagram's monetization efforts?
Not much just yet
During Facebook's second-quarter earnings call, COO Sheryl Sandberg told investors the company plans to be careful to keep the user experience on Instagram. "We're going to be really thoughtful and strategic about how we ramp revenue," she said. "Instagram remains small relative to Facebook and it's going to really take time to have significant impact on our growth."
As a result, the supply of ads for Instagram remains relatively low compared to Facebook. The company's flagship platform has nearly five times as many users and a significantly higher ad load. As a percentage of revenue, Instagram will not account for much.
However, it's worth noting that Instagram's tightly controlled ad load may have a positive impact on its average ad prices, since the new self-serve ads operate on a bidding mechanism just like Facebook's ads. Indeed, Salesforce.com found that the cost per impression for Instagram ads bought through its Social.com platform was 90% higher compared with Facebook ads.
Instagram probably saw similar results internally and determined the best course of action was to expand globally to increase ad inventory instead of increasing ad load. That move will allow the company to maintain high-quality ads and high ad prices.
Big potential
Instagram is still just starting out with self-serve ads, which make up the vast majority of Facebook's revenue. As it attracts more advertisers, it has the potential to continue increasing its ad prices, just as Facebook continues to do.
In the meantime, it's rolling out a few new ad formats that could also increase its ad prices. It's offering advertisers the option of displaying 30-second videos. That's twice the maximum length for non-advertisers, and "coincidentally" the same length as a regular TV commercial.
Additionally, it's working to win back brand advertisers that may be turned off by the higher ad prices resulting from direct-response bidders. A new ad format called "Marquee" is designed to drive mass awareness and expanded reach in a short time frame.
Finally, Instagram is looking to continue increasing ad prices by taking advantage of its parent company's existing ad tech. Instagram advertisers will have access to tools to drive the best performance of campaigns across both Instagram and Facebook. Facebook recently updated its conversion lift tool to allow advertisers to test multiple campaigns to determine which provides the biggest sales lift. Extending that tool to Instagram and allowing advertisers to measure campaigns including Instagram and Facebook ads should drive ad prices higher still and attract even more advertisers.
These features won't be released until Sept. 30, so we won't see any impact from them until next quarter at the earliest. And with the cautious approach Instagram is taking with advertisers, it could be a while still before a meaningful impact. Nonetheless, the company's decision to quickly expand its self-serve ad program globally and continued improvements to its ad products indicate that Instagram is already growing revenue well. It's easy to see how the property will generate a significant amount of revenue for Facebook in the next few years.
