Instagram is Winning (Mobile) Advertising

Instagram has become an effective channel for advertisers and is quickly emerging as the leading platform in mobile advertising.

Strong Secular Tailwinds Continue 

Instagram is very deliberately mobile-first. In fact, a full version of the product does not even exist in desktop form. Our world has shifted to a mobile one. As an industry, mobile advertising should have some serious tailwinds ahead: advertising spend on mobile still significantly lags other advertising channels such as TV, desktop internet, radio, etc. in proportion to user time spent. Assuming that advertisers will aim allocate their dollars proportionally to where users are spending their time, $22 billion in ad dollars stand to shift from other channels to mobile in the US alone[1].

Another very favorable trend we might consider is the convergence of marketing and content. Brands are increasingly seeking to create content that engages users by communicating a story by and coming off more authentic than a traditional ad. So far, Instagram has proven to be one of the best channels for brands to create and disseminate original and organic content.

User Growth and Usage Metrics Show the App is Deeply Engaging

When Facebook acquired Instagram in 2012, the app had 30 million users. Since then, the user base has grown over 10x, with 500 million total users and 300 million daily active users[2]. This growth has been achieved on a global scale; 80% of Instagram’s users are outside of the US[3]. Daily engagement metrics are equally impressive: users spend an average of 25 minutes on the app per day[4]. Clearly, there is a strong value proposition for users.

Value Creation is Also Real for Brands

Instagram offers a compelling value proposition for advertisers as well. First, it is very simple and easy to use. It takes just a couple of minutes for a company to set up a profile. Moreover, the content format (pictures and short videos) makes it easy for advertisers to create new content with low production costs. This is why Instagram is especially valuable for SMBs; they have limited resources and little experience with formal advertising. Instagram is an attractive option for brands, large and small, when compared to more complicated alternatives.  

Perhaps most importantly, ads on Instagram have proven to be very effective. The ads are seamlessly embedded within users’ feeds. The over 500,000 brands on the platform can choose between photo, video, and carousel ads. Advertisers, especially retail brands, are seeing impressive levels of user engagement. Approximately 50% of Instagram users follow at least one company, the majority of top performing Instagram posts feature a retail product, and 75% of users perform an action after seeing an ad on the platform[5]. It’s hard to say definitively due to lack of comparison data, but Instagram likely leads the mobile industry in terms of user/ad engagement. The chart below shows how engagement levels on Instagram compare to those on other platforms.

 

Screen Shot 2017-02-02 at 12.34.00 AM

                                                              Source: TrackMaven

Instagram also provides rich data analytics to brands, which allows them to quickly analyze the success metrics of campaigns they run. This is particularly valuable for less sophisticated businesses. Given all of the preceding factors, Instagram may have the strongest value proposition for mobile advertisers today.  

Monetization Has Been Surprisingly Successful

Instagram’s captures value by charging brands for advertising on the platform, similar its parent company, Facebook. Instagram started monetizing in September 2015[6], and in this short time its sales have skyrocketed. Some estimate that Instagram comprises up to 10% of Facebook’s total revenue–very impressive just a year and a half after monetizing began[7]. While Facebook does not breakout Instagram revenues in its filings, we know that the mobile trend is still going strong: Facebook’s mobile revenue now makes up 84% of ad revenue, compared to 78% approximately year prior (mobile revenue was $7.3 billion in Q4 2016)[8].

Instagram Has Made the Transition to Platform

Now that Instagram has proven its value proposition to advertisers, it has successfully transitioned from a product to a platform company. Advertisers sit on one side of the platform, while consumers sit on another. And the cross-side network effects are very strong. We know that the most successful companies of today are platforms, and that, largely due to network effects, platform companies tend to “tip” the market in their favor. Given its above-market user growth, success with advertisers, and successful transition to a platform, it sure looks like Instagram is positioned to win mobile advertising. 

Sources:

  1. Mary Meeker Internet Trends 2016, Page 45.
  2. https://business.instagram.com/
  3. https://business.instagram.com/
  4. Mary Meeker Internet Trends 2016, Page 93.
  5. https://business.instagram.com/getting-started/#why-instagram
  6. http://www.cnbc.com/2015/09/08/finally-here-comes-instagrams-big-ad-push.html
  7. http://time.com/4299297/instagram-facebook-revenue/
  8. https://techcrunch.com/2017/02/01/facebook-q4-2016-earnings/

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Student comments on Instagram is Winning (Mobile) Advertising

  1. Thank you for a great post. I really enjoyed your analysis. I agree that Instagram has proven its value to the advertisers and as you mentioned, especially, ads that are embedded within users’ feeds are perhaps the most effective and they created a new breed of entrepreneurs as “social influencers”

    There is tremendous amount of research that shows that word of mouth affects consumers. On the other hand, products need to be interesting or exciting to be talked about (actually “texted about” is probably a more proper statement here since compared to oral, written communication is the way of communication of the era and it’s shown to lead people to mention more interesting products and brands). I think this is where Instagram has been successful. Entrepreneurial individuals who are able to create excitement over a boring product that we have seen many times played an important role on the success of Instagram.

    My question is that can Instagram continue with this excitement? Do you think Snap can threaten Instagram and Facebook?

    1. Thanks for the comment! I think that Instagram has a few advantages over Snap. First, the content on Instagram persists, and I think this is important for brands. On Snap, the content that brands generate is useful only for a short time, and I think that this is a turn off for many. Snap is also harder for business to navigate, primarily because the content requires more thought and effort to create. For this reason, I think that Instagram is a far superior advertising solution for small and medium sized business. Essentially all of Snap’s customers thus far have been sophisticated advertisers (and largely media companies that are expert content creators). Instagram is likely stealing share from Facebook in the mobile space, and I think it makes more sense for advertisers (especially retailers) to use Instagram instead. Fortunately for Facebook, Facebook owns Instagram and in a sense is disrupting itself. So long as Facebook is capturing the attrition from the platform via Instagram, Facebook should continue to be successful in mobile.

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