This Small Change Could Make a Big Difference for Instagram

Instagram ads are now clickable. Source: Instagram.

Instagram is branching out when it comes to advertising. The photo-sharing network is rolling out a new ad unit that allows advertisers to link to their Web page. Previously, the only links allowed on Instagram were in a user's profile page. The new ad unit is a small change, but it could make a big difference in Facebook's efforts to monetize the network of 300 million users spending an average of 21 minutes per day on the app.

Still focused on big brandsIn a blog post announcing the new ad unit, dubbed carousel ads, Instagram noted that it's a product still aimed at big brands looking to tell a story on Instagram. The carousel ads allow brands to place multiple images in a post, allowing viewers to see more by swiping left. On the last image, brands can link to a Web page for more information.

These units aren't meant to be a shift to direct-response advertising, and the company won't even measure click-through rates. Instead, they offer a premium ad unit for brands to improve conversions.

This stands in stark contrast to Facebook, which has stepped up efforts over the past year to increase the number of small businesses advertising on its flagship platform. Facebook just announced that it has 2 million advertisers, the vast majority of them being small and medium-sized businesses.

On the flip side, it's a very similar strategy compared with Twitter , which reportedly has just 60,000 advertisers, most of which are big brands. Last year, Twitter pushed media-rich photo and video ad units with special buttons through its Amplify program. In fact, Twitter's ad units have a similar feel to those found in Instagram's new carousel ads.

Last year, Twitter generated about $1.25 billion in ad revenue. Considering Instagram has a slightly larger user base that spends about twice the amount of time on the platform compared to the average Twitter user, Instagram should be able to surpass Twitter's revenue with the help of its new dedicated sales force.

Opening the door for small businessesWhile Instagram says it's still focused on brand advertisers, the inclusion of links in its new ad unit sets the stage for Instagram to start catering to small and medium-sized businesses, or SMBs. The ability to link to a website is essential for many SMBs to even consider buying an ad unit. That's why Google and Facebook have been so successful in attracting a huge number of advertisers -- their main ad units link to another page.

With Facebook's established relationships with SMBs, Instagram should be able to leverage its parent company's position to grow ad revenue in the future. There's still a lot of work for it to do before it reaches that point, however.

Instagram's ad-targeting capabilities leave much to be desired. Facebook's Atlas ad platform can help solve that issue, but more likely Instagram will need to build out more robust native targeting capabilities before many SMBs will advertise on the platform.

Additionally, Instagram still requires final approval from CEO Kevin Systrom before ads go live. That's simply not scalable with small businesses -- or even big businesses. As much as Instagram wants to protect its brand and aesthetics, most of what Systrom does can be automated.

An immediate impact on FacebookWhile Instagram started rolling out ad units in 2013, the impact on Facebook's revenue was minimal during 2014. With a highly engaged and rapidly growing user base, Instagram should be able to grow its advertising revenue significantly in 2015 with the help of its new clickable ad units. A dedicated sales team will increase total advertisers on the platform, and Instagram revenue could play a significant role in Facebook's revenue growth.

Citigroup analysts estimate Instagram could generate $2 billion in high-margin revenue if fully monetized at its current user engagement levels. Based on results from Twitter -- which is following a similar monetization path with big brands -- I'm inclined to agree: $2 billion accounts for nearly 12% of Facebook's estimated 2015 revenue.

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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.

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