Instagram unveiled Instagram Stories in the summer of 2016. By the start of 2017, the new feature had attracted more users than Snapchat -- the obvious source of inspiration. It was also abundantly clear Instagram's Stories was curbing Snapchat's user growth after Snap (NYSE: SNAP) released its user growth details in its IPO filing.
What's undeniable is that Instagram Stories is cutting into Snapchat's advertising base. Since opening advertisements in Stories to all businesses in March last year, Instagram's advertiser base has doubled to two million. Meanwhile, Snap is struggling to attract enough advertisers to make the bidding on Snapchat's self-serve ad platform competitive.
Continue Reading Below
Ninety-six percent of advertisers would rather buy ads on Instagram Stories over Snapchat Stories, according to a recent survey from Cowen & Co. analyst John Blackledge. Instagram Stories has a faster-growing user base, room to increase its ad load, and the backing of Facebook (NASDAQ: FB). That presents a huge challenge for Snap to overcome.
Instagram has three big advantages over Snapchat
It didn't take long for Instagram Stories to surpass Snapchat's user count. As of November, Instagram has 300 million daily users for its Stories feature, while Snap ended the third quarter with 178 million. On top of that, another 200 million use Instagram's other features (500 million daily users total), and 800 million users open the app at least once a month.
The sheer breadth of Instagram's audience makes it a much more attractive platform than Snapchat, especially for reaching people outside of Snapchat's core user group. Forty-three percent of Snapchat's users are from North America, and it primarily attracts users under 35. While that's a valuable demographic, many advertisers would prefer to reach a broader or different audience.
Instagram also benefits from superior ad targeting. Snapchat's ad targeting data is minimal compared to the data Facebook provides advertisers. What's more, the capabilities Snap gives advertisers to use that data for targeting advertisements are significantly curbed compared to the tools provided by Facebook and Instagram. So, not only do advertisers have a chance to reach a broader audience, they can also find the specific group of people that will respond best to their message. That's why Facebook advertisers are willing to spend more per ad impression on Facebook while Snap has seen its ad prices decline since opening its self-serve ad platform.
Finally, Instagram benefits from close integration with Facebook. Facebook itself has over 6 million active advertisers, and it's by far the biggest social advertising platform in the world. Facebook has developed tools that make it easy to run ad campaigns across both Facebook and Instagram, retarget users that saw an ad on one app with an ad in the other app, and keep an eye on the overall campaign's performance. Snapchat requires integration with third-party software to manage campaigns across multiple social platforms.
There must be a limit
There are some limits to Instagram's success over Snapchat. Advertisers care most about getting a good return on their investment. While Instagram ads can be more effective than Snap Ads, they're also more likely to cost more. At some point, average ad prices will increase to the point where more advertisers would prefer to buy ads on Snapchat.
But there seems to be a long way to go until it gets to that point. Instagram only started rolling out advertisements in Stories a year ago, so there should be room for Instagram to increase its ad load for the feature. Additionally, user growth continues to rocket higher with Instagram's overall user growth accelerating since adding the stories feature. Those two things should provide a relatively long runway for ad impression growth. Then it's a matter of reaching equilibrium with advertisers on what they're willing to pay.
Meanwhile, Snapchat may be hard pressed to attract new advertisers and grow revenue very quickly. Analysts have repeatedly slashed their estimates after multiple quarters of disappointing earnings results. Snap is working on solutions to make its ads more engaging and valuable, but that won't make a big difference if it can't attract advertisers to buy those ads in the first place.
Find out why Facebook is one of the 10 best stocks to buy now
Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. (In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the market!*)
Tom and David just revealed their ten top stock picks for investors to buy right now. Facebook is on the list -- but there are nine others you may be overlooking.
*Stock Advisor returns as of January 2, 2018