Strong Secular Tailwinds Continue
Instagram is very deliberately mobile-first. In fact, a full version of the product does not even exist in desktop form. Our world has shifted to a mobile one. As an industry, mobile advertising should have some serious tailwinds ahead: advertising spend on mobile still significantly lags other advertising channels such as TV, desktop internet, radio, etc. in proportion to user time spent. Assuming that advertisers will aim allocate their dollars proportionally to where users are spending their time, $22 billion in ad dollars stand to shift from other channels to mobile in the US alone.
Another very favorable trend we might consider is the convergence of marketing and content. Brands are increasingly seeking to create content that engages users by communicating a story by and coming off more authentic than a traditional ad. So far, Instagram has proven to be one of the best channels for brands to create and disseminate original and organic content.
User Growth and Usage Metrics Show the App is Deeply Engaging
When Facebook acquired Instagram in 2012, the app had 30 million users. Since then, the user base has grown over 10x, with 500 million total users and 300 million daily active users. This growth has been achieved on a global scale; 80% of Instagram’s users are outside of the US. Daily engagement metrics are equally impressive: users spend an average of 25 minutes on the app per day. Clearly, there is a strong value proposition for users.
Value Creation is Also Real for Brands
Instagram offers a compelling value proposition for advertisers as well. First, it is very simple and easy to use. It takes just a couple of minutes for a company to set up a profile. Moreover, the content format (pictures and short videos) makes it easy for advertisers to create new content with low production costs. This is why Instagram is especially valuable for SMBs; they have limited resources and little experience with formal advertising. Instagram is an attractive option for brands, large and small, when compared to more complicated alternatives.
Instagram also provides rich data analytics to brands, which allows them to quickly analyze the success metrics of campaigns they run. This is particularly valuable for less sophisticated businesses. Given all of the preceding factors, Instagram may have the strongest value proposition for mobile advertisers today.
Monetization Has Been Surprisingly Successful
Instagram’s captures value by charging brands for advertising on the platform, similar its parent company, Facebook. Instagram started monetizing in September 2015, and in this short time its sales have skyrocketed. Some estimate that Instagram comprises up to 10% of Facebook’s total revenue–very impressive just a year and a half after monetizing began. While Facebook does not breakout Instagram revenues in its filings, we know that the mobile trend is still going strong: Facebook’s mobile revenue now makes up 84% of ad revenue, compared to 78% approximately year prior (mobile revenue was $7.3 billion in Q4 2016).
Instagram Has Made the Transition to Platform
Now that Instagram has proven its value proposition to advertisers, it has successfully transitioned from a product to a platform company. Advertisers sit on one side of the platform, while consumers sit on another. And the cross-side network effects are very strong. We know that the most successful companies of today are platforms, and that, largely due to network effects, platform companies tend to “tip” the market in their favor. Given its above-market user growth, success with advertisers, and successful transition to a platform, it sure looks like Instagram is positioned to win mobile advertising.
- Mary Meeker Internet Trends 2016, Page 45.
- Mary Meeker Internet Trends 2016, Page 93.