Another Reason Instagram Is So Valuable to Facebook Inc.

By Markets Fool.com


Source: Instagram.

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The Pew Research Center recently released a study detailing the social network habits of teenagers. Some interesting findings from the study outlined distinct patterns in social media use based on household income. Teens from less well-off households are more likely to use Facebook the most among social media options, according to the research, while teens from more well-off households are more likely to use Instagram most. Lucky for Facebook, it owns Instagram.

Other competing social platforms saw an increase in favoritism as household incomes climbed, including Snapchat and Twitter . Only Facebook saw a notable decline in being the most often-used network as household income increased, dropping from being the top choice of 51% of teens in households with less than $30,000 annual income to being the top choice of 31% of teens in households with more than $100,000 annual income. In that top income level, Instagram was the most-often used for 25% of teens. This trend could ultimately impact Facebook's ability to monetize its users on its flagship platform, but also points to the huge potential with Instagram.

Advertisers follow dollars
The whole point of advertising is to separate people from their money. Advertisers will have greater success if people with higher disposable incomes see their ads. As such, they'd be willing to pay more for those ad spots because they convert better.

Source: Pew Internet

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Facebook has yet to maximize its ad prices. Last quarter, the company's average price per ad increased 285% due to a decrease in total ad impressions -- caused by a change in its layout).There's still plenty of room for Facebook to continue increasing ad prices, especially as it improves targeting across devices, and rolls out more video ad units. Still, the platform may ultimately be limited by a lower average income of users than other platforms.

Twitter, comparatively, has seen a fairly consistent decline in cost per ad engagement as it continues to expand its ad inventory. Last quarter, however, the company reported an increase in cost per engagement, indicating that its audience has a higher value than the company originally expected. The data from the Pew study backs that up, with 8% of teens in households with incomes higher than $75,000 preferring Twitter compared, to just 3% in households with incomes lower than $30,000.

Higher ad prices are key to increasing average revenue per user. We won't get a clear view of Facebook's ad saturation until the third quarter, due to changes it made last year. But as ad impressions per user stop growing, the only way to increase revenue is through higher ad prices. The other option is to expand its advertising to other platforms, which it's already doing with its Facebook Audience Network and Instagram.

Monetizing Instagram
Instagram has been in the early stages of monetization for a year-and-a-half now. It first rolled out advertisements in 2013, but Instagram CEO Kevin Systrom insists on hand-reviewing each ad unit before letting it out in the wild. Ultimately, Facebook will have to scale Instagram's ad platform -- and the current system isn't scalable.

On the other hand, eschewing the review process may cause some advertisers to try to place advertisements that don't quite fit in aesthetically with the rest of a user's Instagram feed, diminishing the user experience. Facebook has a lot of artificial intelligence tools that could help prevent those sorts of ads from being approved, but it's still a risk involved with scaling.

There are other hurdles to overcome with monetizing Instagram, as well. For one, Instagram typically doesn't allow links within posts, so its ad units are mostly only valuable to big-brand advertisers -- the kind that buy television spots and billboards. Comparatively, Facebook has made tons of ad revenue off of small and medium-sized businesses on its flagship platform. The redeeming factor is that many brand advertisers would rather reach an audience with higher average household incomes, which Instagram can do.

It's worth noting that Instagram recently rolled out a new "carousel" ad unit that allows the advertiser to link out to a website after a user engages with the ad. This could easily translate into app-install ads, a unit Facebook has had excellent success with in its Facebook app.

Instagram has a lot of immediate potential with brand advertisers considering it's used more often by easily influenced teens from higher-income households. Down the line, however, Facebook needs to determine how to scale its ad business to take advantage of the growing number of Instagram users -- now at 300 million monthly users -- and the growing interest among smaller businesses to advertise to those young affluent users.

The article Another Reason Instagram Is So Valuable to Facebook Inc. originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, and Twitter. The Motley Fool owns shares of Apple, 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.