Instagram introduced advertisements on its platform more than two years ago, but it has yet to provide meaningful revenue for its parent company, Facebook (NASDAQ:FB). This summer, however, Instagram opened its ads API to everyone in more than 30 countries, opening up the massive potential of its 400 million active users.
But there's one thing advertising platforms need to succeed, and it's an area in which Instagram is currently lagging behind competitors such as Twitter (NYSE:TWTR) and its parent company. It needs more businesses on the platform. Facebook touts 45 million small and medium-sized businesses on its platform, and Twitter has become a hub for businesses to handle customer interactions. According to a recent report from eMarketer, only 32.3% of U.S. businesses have a presence on Instagram, compared with 65.8% and 84.7% for Twitter and Facebook, respectively.
But the future is bright
That same eMarketer report notes that businesses will rapidly adopt Instagram over the next two years, surpassing the number of businesses on Twitter by 2017. The total percentage of U.S. businesses on the platform is expected to more than double to 70.7%.
This outlook fits perfectly into Facebook's playbook to monetize its satellite properties such as Instagram and Messenger. During Facebook's second-quarter earnings call, CEO Mark Zuckerberg told investors, "If you go back to 2006 and 2007, there were a lot of people who were encouraging us to just put banner ads and inorganic content into the experience, and what we decided was that over the long term, the ads and monetization would perform better if there was an organic interaction between people using the product and businesses."
The company focused on building businesses presence on Facebook and encouraging interaction between businesses and customers. The result is a company that's expected to generate over $17 billion in revenue this year. Building up the business population on Instagram will result in similar results.
Winning an outsized portion of social ad spend growth
The relatively rapid expansion of both Instagram's user base and the number of businesses on Instagram should enable it to win a larger share of social ad spend over the next two years. In fact, with the percentage of businesses with a presence on Facebook and Twitter staying relatively stable, Instagram should win a significant portion of the new ad money coming into social.
eMarketer expects U.S. businesses to spend an additional $6 billion on ads placed on social networks in 2017 compared with 2015. That's a 58% increase over the next two years. That ad spend growth is Instagram's opportunity.
With Instagram current trajectory, it's reasonable to expect the platform to capture around one-third of that growth, or $2 billion. Indeed, an earlier report from eMarketer said it expects the social network to bring in $2.81 billion globally in 2017, with the vast majority coming from the United States.
With its ability to integrate Facebook's targeting capabilities with its network, Instagram should be able to offer effective ad units. Early indications are that Instagram ads have higher engagement, resulting in higher ad prices despite similar costs per click. Businesses are probably attracted to Instagram's ad efficacy and its young audience. These trends will only help Instagram accelerate increases in its ad revenue and become a major growth driver for Facebook in the future.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.