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 skepticism, but by December 2014, Citigroup analysts were saying that Instagram was worth $35 billion. Just four years later, Bloomberg estimates that Instagram is now worth close to $100 billion, 10 times what Facebook paid for it.
On September 25, 2018, Instagram founders Kevin Systrom and Mike Krieger announced that they were leaving the company, and news reports suggest that the decision was made on account of Facebook CEO Mark Zuckerberg.
Does that change Instagram's exponential growth trajectory? That remains to be seen. Here's a look at how the company makes money and has within six years evolved as one of Facebook's biggest cash cows.
Advertising on Instagram
Instagram makes its money from advertising, just like Facebook. Facebook doesn’t break out Instagram’s financials, but 98% of all Facebook revenue came from advertising in 2017. That number stood at 97% for 2016 and 95% for the year before, according to the company's annual reports.
A portion of that revenue almost certainly came from Instagram, which introduced paid advertising on its service in 2013. Since then, its advertisers have flocked to Instagram.
Some research has gone on to show that advertising growth on Instagram is actually exceeding that of its parent Facebook. According to Merkle’s Digital Marketing Report for the second quarter of 2018, advertiser spending on Instagram for the period grew 177% year over year, compared to only 40% for Facebook. Impressions for Instagram in the same quarter grew by 209% year-over-year versus a negative 17% for Facebook.
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 June 2018, the social media platform has surpassed the 1 billion user milestone.
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 88% of ad revenues in 2017, compared to 83% in 2016.
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.
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 its rival Snapchat (SNAP). In 2016, Instagram launched Instagram Stories, as well as disappearing photos and videos for groups on Instagram Direct, a feature suspiciously close to Snapchat's My Story.
Additionally, Instagram benefits from being one of the original and 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.