Instagram is growing its user base rapidly and its advertiser base even faster. In September, Instagram announced it surpassed 800 million monthly active users, but the fact that it surpassed 2 million active advertisers was, perhaps, more interesting.
Instagram is well ahead of the curve its parent company Facebook (NASDAQ: FB) set, and that's an impressive feat. In a previous article, I wrote, "[Instagram] should be able to produce more than the $3.7 billion Facebook made when it reached the same level of users back in 2011." Indeed, Instagram will generate $4.1 billion this year, according to an estimate from eMarketer. The research group expects that number to balloon to $10.9 billion by 2019.
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Let's take a look at what's fueling growth at Instagram, and the importance of that growth for Facebook investors.
Connecting businesses with users
About a year and a half ago, Instagram introduced new tools for businesses on Instagram with a suite called Business Profiles. Since then, it's managed to attract 25 million businesses to Business Profiles. Of those, 2 million actively use Instagram's ad products to reach the 800 million users on Instagram.
eMarketer estimates total users is actually closer to 600 million after accounting for businesses, fake profiles, and duplicate profiles. Still, that number absolutely dwarfs competing platforms like Twitter (NYSE: TWTR) and Snap's (NYSE: SNAP) Snapchat. Twitter ended the third quarter with 330 million users, and also suffers from duplicate and fake profiles. Snap most recently reported 178 million daily Snapchat users.
Either way you look at it, Instagram presents a much broader user base than two of its closest competitors. The only platforms offering a broader user base are Facebook and those owned by Google -- YouTube, Search, etc. That makes Instagram, in and of itself, a very attractive advertising platform.
Piggybacking on Facebook
What makes Instagram that much more attractive is its attachment to Facebook. Advertisers can use user data across both Facebook and Instagram to target their messages. That wealth of data makes ads much more effective compared to Twitter or Snapchat, enabling it to command higher pricing. In fact, Snap saw disappointing results when it opened its self-serve ad platform, with fewer advertisers bidding on it causing the average ad price to decline.
On top of that, Facebook provides an excellent funnel to sell more Instagram ads. That funnel will grow even bigger as Facebook bumps up against ad load saturation. Management warned it's no longer increasing ad load on Facebook following the second quarter of last year. But there's still plenty of room to show more ads on Instagram.
As Facebook advertisers look for more places to show their ads, Instagram is naturally benefiting. A 2.6 times increase in ad revenue in two years is well within reason considering there are millions of advertisers on Facebook looking for a new place to show their ads.
Keeping ad dollars out of the hands of the competition
While winning users might not be a zero-sum game (a user can spend time across a variety of apps), winning ad dollars certainly is (an advertiser only has so much in the budget). Considering Instagram's position in the market, that's bad news for Twitter and Snap, who are competing for similar ad dollars as Instagram.
While eMarketer expects Instagram's revenue to climb by more than $6 billion over the next couple years, Twitter and Snap will be fighting for scraps. Analysts expect Snap to capture $1.3 billion in revenue next year, representing about 60% growth. Still, that's way down from initial expectations from before its IPO. Meanwhile, analysts aren't predicting much growth at all from Twitter, expecting it to grow the top line just 6%.
Instagram will further cement Facebook's position as one of the two dominant forces in digital advertising, and it should help fuel further growth in the company's top and bottom lines for several more years to come as it grows to become its next billion-user business.
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