Image Source: Instagram.

Instagram is going after a piece of the $9.9 billion digital video advertising market. As of February, the amount of time its users spend watching video had increased 40% over the preceding six months, according to Facebook (NASDAQ:FB) COO Sheryl Sandberg. And advertisers are noticing.

Brand Networks, one of Instagram's early ad partners, found that 58% of ad impressions for its clients were video ads. That number steadily ramped up in the quarter from 43% in January to 65% in March, more than double the percentage of ads that were videos in December. Nanigans, another ad partner that caters to small direct-response advertisers, saw its advertisers increase their Instagram video ad budgets 70% from February to April.

Instagram and Facebook have invested heavily in video, and it's starting to pay off.

Video ads on Instagram are cost effective for advertisers

Many advertisers are finding video ads to be extremely cost effective. Chris Tuff from ad agency 22Squared says average cost per view comes in between $0.02 and $0.10 on Instagram. Facebook also makes it easy to optimize videos for mobile devices and Instagram lifted cumbersome restrictions on length and formatting to make it equally cost effective to produce video ads.

But Instagram has to be careful to avoid the same fate Twitter (NYSE:TWTR) suffered last quarter. In the first quarter, Twitter saw video ad spend increase sequentially from the fourth quarter -- despite the typical seasonal decline in ad revenue. However, the increase in video ad spend came almost entirely from its older promoted tweets. Overall ad revenue still declined 17% sequentially.

On Facebook's first-quarter earnings call, Sandberg was sure to note "video ads take the place of another ad in News Feed so not all of the revenue incremental." Since these social networks use a bidding system, many advertisers are able to get a deal on video ads as the market has yet to catch up.

What this all means for Facebook investors

The growth in video ad spending on Instagram is great news for Facebook investors. Users are engaging with video more and advertisers want in on that action. The only problem is that Instagram (and Facebook to a lesser degree) isn't receiving the full value of its video ad inventory. That's because there are still relatively few video ad buyers on the platform, allowing video ads to be bought near the same price as static ads. 

The good news is that number is growing rapidly. As demand for video ads on Instagram grows, so too will the price per view. And if Facebook and Instagram continue to innovate in ways that allow them to reduce the cost to produce videos, they will continue to attract more video advertisers.

With the majority of ads on Instagram being videos, the potential growth in ad revenue from the platform is only getting bigger. Instagram has already shown that it's capable of earning higher average ad prices than Facebook. Once video ad prices catch up with their true value, Instagram's ad revenue will become a real growth driver for Facebook stock.