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Instagram's User Growth Is Not Slowing Down

By Adam Levy – Sep 29, 2015 at 9:00PM

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Instagram just passed 400 million users while Twitter stalls.

Source: Instagram.

It was just last September when Instagram announced that it had surpassed 300 million monthly active users, beating Twitter (TWTR) to the punch. Twitter's three-month average for MAUs didn't top 300 million until the first quarter of this year.

But since that time, Twitter's user growth has stalled while Instagram's keeps on moving. Earlier this month, Instagram announced that it had surpassed 400 million monthly active users. Twitter's latest earnings report shows just 2 million net new active users from the first quarter (excluding SMS fast followers that don't use the app).

How does the Facebook- (META -1.16%) owned app keep growing its users while Twitter lags behind?

Huge international growth
In a blog post announcing the milestone, Instagram noted that 75% of the last 100 million users are from outside the United States. More than half of those new users are from Europe or Asia, with the largest contributing countries being Brazil, Japan, and Indonesia.

That may explain the reasoning behind Instagram's recent decision to open up its advertising API to 30 more countries earlier this month, bringing the total to 38. Instagram says the additional regions cover almost all of its user base.

Twitter, too, has seen the vast majority of its new users come from other countries. More than 85% of new users added over the last year came from outside the United States. The difference is that Twitter only added 6 million new users in the U.S. over the past year, and only 2 million since the third quarter of last year. Instagram, comparatively, still added 25 million net new U.S. users over the last nine months.

Growing U.S. users is still very important
While international growth plays a very important long-term role, the United States presents a much better opportunity to start generating meaningful revenue in the near term.

Twitter generated an average of $4.33 in ad revenue per U.S. user during the second quarter. That number for international users was just $0.66. What's more, U.S. ad revenue growth per user is nearly in line with the international number: 42% ad revenue growth in the U.S. vs. 50% internationally.

The trend is even more pronounced at Facebook, where ad ARPU for U.S. and Canadian users came in at $8.63 last quarter, growing nearly 50%. Comparatively, Europe and Asia-Pacific brought in $3.19 and $1.25 per user, respectively. Moreover, the U.S. and Canada is actually growing ad revenue per user faster than any other region.

Some of this outsized domestic growth can be attributed to foreign exchange rates, which will undoubtedly have a notable effect on both companies' third-quarter earnings. Still, it's clear that U.S. users have a ton of value. With U.S. user growth still going strong, the next step is for Instagram to start unlocking that value.

More brands and more ads
With a user base that's notably larger than Twitter's, Instagram is now well-positioned to attract more brand advertisers. Twitter's largest source of ad revenue comes from direct sales to brand advertisers. With 400 million users to Twitter's 304 million, Instagram represents a much larger threat to Twitter's biggest business.

To that end, Instagram is just starting to ramp up advertising. It's been experimenting with branded ads for almost two years, but tests have remained small. This summer, the company opened its ads API, enabling more businesses to buy ads, and the results have been very good so far. Instagram was able to achieve ad prices nearly twice as high as the average Facebook ad in the early going, and there are reasons to believe that trend will continue.

It's only a matter of time before Instagram's ad revenue surpasses that of Twitter's. For reference, Twitter generated $1.6 billion in ad revenue over the last 12 months. Research company eMarketer expects Instagram to generate $600 million this year and $2.8 billion in 2017. If that forecast is accurate, 2017 could be the year Instagram surpasses Twitter's revenue and produces meaningful revenue for Facebook.

With the continued growth in its user base and the early indications in its advertising efforts, I wouldn't be surprised if Instagram hits that milestone even sooner.

Adam Levy has no position in any stocks mentioned. The Motley Fool owns and recommends Facebook and Twitter. 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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