Image source: Facebook.
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Since March 2014, when Instagram hit 200 million active users, the photo-sharing app has provided an update about once every nine months telling us it added another 100 million to its total user count. But Instagram's most recent update -- a Dec. 15 note saying it had crested 600 million "Instagrammers" -- came early, about three months early if we're going by the 100-million-users-every-nine-months schedule.
The Facebook (NASDAQ: FB) subsidiary added 100 million new users in just the six months from June to December. Seen another way, Instagram is adding 50% more users per month these days than it had been over the previous two years. The accelerated growth is a validation of all of the recent changes Instagram has made, and it couldn't have come at a better time considering concerns over advertising growth on Facebook's flagship platform.
Copying other products works
Some of the biggest changes to Instagram over the past few months are the introduction of an algorithmic feed, which tries to figure out what you want to see and put that at the top of your feed, just like Facebook's News Feed, and a new feature called Stories, which is a blatant copy of Snapchat's feature of the same name. Users can share photos and short videos with their followers that disappear after 24 hours.
Recently, Instagram also added live video, competing with Twitter'sPeriscope as well as Facebook's Live feature. Unlike live videos on Facebook, live Instagrams disappear after they're done broadcasting, which may give users the sense that they'll miss something if they don't constantly check the app.
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None of these moves are designed to steal users away from Snapchat or other platforms with similar features. Instead, they make it more likely that a user won't leave Instagram for another app in order to use Stories or live-streaming.
And they seem to be working. The new features give users more ways to engage with the platform, reducing the percentage of users who abandon the app. As a result, Instagram is seeing its active user growth accelerate.
User growth is paramount to Facebook's continued revenue growth
Facebook CFO Dave Wehner has issued a couple of warnings this year that ad load on Facebook's News Feeds -- i.e., the number of ads it displays per organic News Feed item -- is nearing saturation. During the company's third-quarter earnings call, Wehner told analysts, "With a much smaller contribution from this important factor [ad load] going forward, we expect to see ad revenue growth rates come down meaningfully."
There are a few other driving factors, though, including the amount of time users spend on Facebook and Instagram and continued increases in ad demand, that will drive ad prices higher. But the biggest factor going forward is likely user growth.
While the vast majority of Facebook's revenue comes from its flagship platform, Instagram is starting to produce significant amounts of incremental revenue growth. That's evident in the revenue growth acceleration Facebook experienced over the last year. It grew ad revenue 59% year over year last quarter compared to 45% in the same quarter a year ago.
Instagram could bring in $3.2 billion in mostly incremental ad revenue in 2016, according to an October analysts note from Credit Suisse, as reported by Barron's. Those analysts expect that number to double to $6.4 billion next year. For reference, the average analyst expects Facebook's total revenue to reach $27.3 billion this year and $36.7 billion next year. In other words, Instagram could account for around one-third of Facebook's revenue growth next year. That's largely thanks to both a faster user growth rate and the fact that there's still room to squeeze more ads into its users' feeds.
The recent news that Instagram's user growth is accelerating means Instagram's contribution to Facebook's overall revenue growth could be higher than originally anticipated. If that's the case, Facebook investors will be handsomely rewarded as the company's valuation and stock price increase.
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