When Facebook bought mobile photo-sharing app Instagram for around $1 billion in cash and stock in April 2012, Instagram was less than two years old and had no revenue. The deal was met with widespread mockery, including a segment on “The Daily Show.” But by December 2014, Citigroup analysts were saying that Instagram was worth $35 billion.

Instagram, Facebook and Advertising

Instagram makes its money from advertising, just like Facebook. Facebook doesn’t break out Instagram’s financials, but in 2016, about 97% of Facebook's third-quarter revenue was derived from ads. Ad revenue for the quarter was $6.82 billion, a 59% increase from the same quarter the year before, according to the company's latest quarterly report.

A portion of that revenue almost certainly came from Instagram, which introduced paid advertising on its service in 2013. Since then, its advertisers have included Nike Inc. (NKE), General Electric (GE) and Walt Disney Co. (DIS).

See also: Instagram Claims More Than 1M Monthly Advertisers

The Inexorable Growth of Mobile

Instagram’s strength, and the main reason Facebook purchased it, is its devoted – and growing – mobile user base. As of April 2017, Instagram reports over 600 million daily active users according to its website. 80% of Instagram's users are outside of the US. Facebook CEO Mark Zuckerberg has said the app is on its way to reaching 1 billion people.

See also: Facebook's Instagram Surpasses 600M Users (FB)

When it bought Instagram, analysts criticized Facebook for having little presence on mobile phones. Mobile has been a growing segment of Facebook’s advertising, accounting for 84% of ad revenues in the third quarter of 2016, compared to 78% from the same quarter in 2015.

Advertising on Instagram is becoming increasingly sophisticated. One of the features allows advertisers to show slideshows and link to sites outside Instagram. Its carousel ads “bring the potential of multi-page print campaigns to mobile phones – with the added benefit of taking people to a website to learn more,” according to Instagram’s business blog

Instagram Leverages Brand

That brand advertising has thus far eluded some of Facebook’s biggest web competitors. The blog Stratechery has identified dependence on click-through ads and failure to build a business in brand advertising as one of Google’s biggest weaknesses. If Instagram can win a significant part of that market, it would become, as Zuckerberg predicts, a meaningful business in its own right.

The Bottom Line

Like many big names in social media, Instagram started as a fun idea without a clear path to profit. Similar to its parent company, Facebook, advertising has become the key to its monetization. Because it is fundamentally a photo sharing app, it is a natural platform for branded advertising. Many iconic companies whose brand visuals are immediately recognizable, such as Nike, have eagerly embraced the platform.

The company also tries to stay in line with industry trends, and has on occasions been accused of stealing features from the rival Snapchat (SNAP). In 2016, Instagram launched Instagram Stories and disappearing photos and videos for groups on Instagram Direct, a feature suspiciously close to Snapchat's My Story. 

See also: Facebook's WhatsApp Introduces Snapchat-Like Feature (FB, SNAP)

Instagram additionally benefits from being one of the original and one of the most successful mobile-first social media apps. As computing moves away from the desktop for all demographics, but especially for Millennials who are considered "digital natives," the importance of being first in the mobile space pays rich dividends. Instagram is well placed to be the dominant platform for advertising in the 21st century.

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