Image source: Facebook.
Checking Facebook (NASDAQ: FB) is a daily habit (if not an hourly habit) for most of its users. In December, 66% of Facebook's 1.86 billion monthly users checked in on an average day. That kind of daily user engagement is unparalleled by similar services like Twitter (NYSE: TWTR) or LinkedIn.
But Instagram has quickly caught up with its parent company in terms of its daily user to monthly user ratio. On Facebook's fourth-quarter earnings call, CEO Mark Zuckerberg announced that Instagram reached 400 million daily active users, around 67% of its 600 million monthly active usersannounced in December. That's a huge improvement from just last summer, when its DAU/MAU ratio was just 60%. At the end of 2013, just over half of Instagram users checked the app daily. Growing daily users will be one of the biggest revenue growth drivers for Facebook going forward and provides a much better indication of the platform's health than monthly users.
A symbiotic relationship
Facebook originally purchased Instagram as it noticed the photo-sharing app was a threat to its own user engagement. If people started using Instagram more, Facebook was at risk of its users logging in less often.
But Zuckerberg said the opposite is happening these days. "As we encourage people to use both Facebook and Instagram, engagement on both can increase," he told analysts on Facebook's fourth-quarter earnings call.
Indeed, even while Instagram's user growth and engagement have exploded over the last couple years, Facebook users still log in daily at an ever-increasing rate. In the fourth quarter of 2014, Facebook's DAU/MAU ratio was just 64%. Last quarter, it climbed to 66%.
Granted, that didn't just happen. Facebook engineered that symbiotic relationship by integrating both platforms with one another while snubbing others like Twitter. (Users have to click a link to see Instagram photos on Twitter while they post natively on Facebook.) It shows the value of owning multiple platforms.
Daily users are even more important than monthly users
Daily users can give investors a better picture of how much value an app like Instagram is able to generate from its user base. You can't click on an ad if you're not logged in.
That's why it's incredibly frustrating that Twitter won't reveal details about its daily users. The last update Twitter provided was that its DAU/MAU ratio was 44% in its top 20 market and falling. That was in its second-quarter 2015 earnings call, and its revenue growth since that time has been unremarkable, to say the least.
Instagram and Facebook, on the other hand, have benefited greatly from the growing percentage of users logging in every day. Going forward, that will play an even bigger role in growing Facebook's ad revenue. CFO Dave Wehner warned investors last year that ad load on its flagship app was nearing saturation. As such, continued revenue growth will stem from higher engagement rates, leading to more total ads displayed.
While management noted there is room for more ad load growth on Instagram over a longer time frame than Facebook, it also said it's still a relatively small portion of revenue. But if Instagram can continue to grow at the rapid pace it has been (about 100 million new daily users in the last seven months), it may not be long before it's approaching the scale of Facebook's flagship app today (1.2 billion daily users).
For reference, Facebook generated $27 billion in ad revenue last year. Credit Suisse estimates Instagram could produce $12 billion in revenue by 2021, but with the recent acceleration in daily user growth, that may be shortchanging Facebook's ability to monetize Instagram's user base.
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