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Facebook's Instagram Is About to Look a Whole Lot Different

By Andrew Tonner – Mar 21, 2016 at 2:06AM

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As its continues to print profits, Facebook's Instagram subsidiary is about to make one of the most important decisions in its short history.

Source: Instagram.

When it comes to tech acquisitions, social media juggernaut Facebook (META 1.97%) has historically had the golden touch. Like rival tech giant Microsoft, Facebook has, at times, backed up the proverbial dump truck to spend lavishly on purchasing would-be competitors, or intriguing new technologies. Unlike some of Microsoft's less successful ventures, however, Facebook's largest bets so far appear prescient in the extreme.

Case in point: Facebook paid $1 billion in 2012 to acquire picture-driven social network Instagram. Given the company's explosive growth, Facebook's aggressive maneuvers in the years since have been more than validated. However, Instagram's best days still likely lie ahead, as the company stands on the eve of one of its important product shifts since its founding.

Source: Instagram.

Coming to a feed near you
According to a blog post from the company, Instagram plans to overhaul the way images and videos appear in a user's feed. Since its founding, images and videos appeared in reverse chronological order, or with the most recent posts appearing first. However, as a result of its coming changes, Instagram posts will soon appear based on an internal relevance score developed by the company.

The company apparently plans to gradually implement these changes, but given the highly public nature of its announcement, it seems fair to expect Facebook's smaller social brethren will eventually rollout this change to its entire user base.

The logic underpinning the move seems sound. According to the press release, Instagram's internal research reveals that, on average, its users miss roughly 70% of the images and videos posted to their feeds. For so popular a service, that's a pretty massive engagement gap.

However, for those who are uneasy with a change coming to their beloved Instagram, it's also possible that the company might not make the new, algorithmic-based presentation permanent, but merely the default setting, a la Twitter, which did just that with its own recent timeline tweaks. Either way, this move represents a seminal decision for Instagram, and one that Facebook investors should also be closely monitoring.

Source: Instagram

$1 billion well spent
Facebook still declines to breakout Instagram's revenue figures, though we know the platform's active user base now lies well north of 400 million. By all accounts, though, business is absolutely booming at the picture and video-sharing start-up since it fully opened its ad platform late last year.

According to estimates from investment bank Credit Suisse, Instagram produced about $730 million in sales in Q4 2015. What's more, the company believes that Instagram advertising revenue will rise to over $3.2 billion in the full-year 2016, an absolutely astonishing feat for a company that finished scaling its ad product just last year. The average analyst estimate calls for Facebook, as a whole, to generate $25.5 billion in sales in 2016, implying Instagram will contribute roughly 12.5% to the company's top line, assuming, of course, that Credit Suisse's estimates prove accurate.

With so much on the line, Instagram could be viewed as taking an undue risk in reworking the way its users experience the platform -- killing the proverbial golden goose. While such a risk exists to a certain extent, creating an improved way for users to find relevant material on Instagram seems more likely to increase user engagement, not decrease it. While Instagram's impending feed overhaul could make some readers uneasy, this is likely just the next step in further monetizing Facebook's booming subsidiary.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of 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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