Facebook brings monetisation to Instagram – Annoying or relevant?

The inevitable has happened. Ever since Facebook acquired Instagram for $1 billion back in April 2012, its huge user base has been expecting ads to be rolled out, and it is finally happening.Facebook has been a late mover to mobile. After their initial missteps and poor quality apps, they took the smart but long-term approach of going back to the drawing board and creating the mobile app from the ground up. However, once the IPO happened and the market trained its well-oiled guns for its never-ending quest for quarterly gains and earnings per share (EPS) increase, the push on advertising has been aggressive. Of course, there has been user backlash, and Facebook seems to be finding the sweet spot with respect to the quantity and positioning of their ads.

The last few quarters have been a roller-coaster ride for the Facebook stock, fluctuating widely between insanely high expectations and dejected worst case estimates. The reality lay somewhere in between. But it became steady only after the firm showed incremental and sustainable gains in the mobile ads business. In Q2 of 2013, mobile advertising revenues represented about 41% of the company’s overall advertising revenue. Given Facebook’s 819 million mobile users, that translates to about 80 cents of average ad revenue per mobile user. With 150 million users, 16 billion photos total and 1 billion likes per day, Instagram can contribute significantly to these gains – $120 million to be precise.According to Instagram’s official blog, “Our aim is to make any advertisements you see feel as natural to Instagram as the photos and videos many of you already enjoy from your favorite brands”.

They seem to be taking baby steps based on all the backlash on ads when Facebook introduced them. Some things that might actually make ads on Instagram a less annoying feature than in most other apps and sites:

• Only a handful of advertisers are being allowed to publish ads on the platform. These include Adidas, Burberry and Levi’s.
• Ads of brands will be shown even if one is not a follower of that brand on Instagram.
• Users can click on the “…” at the bottom of the ad to let Instagram know if they didn’t like an ad and why, so that more relevant ads are shown to each person.
• Ads are being sold directly by Instagram’s sales team and not through and ads API. This is presumably to control the aesthetic quality of advertisements given that the platform’s success is based on great visual imagery.

Over the next week, Instagram users will see an ‘educational’ ad, about Instagram. It is an overhead shot of a man sitting at a long wooden table with a smartphone and a laptop with Instagram logo. It has the word “Sponsored” and the “…” at the top and bottom respectively, to educate users on how ads will look like, going forward.

Our view

Facebook seems to be taking a better approach than earlier for its ads launch on Instagram. It is a well-known trend that successful apps and sites take the route of building a huge user base over a period of time with an excellent product and then monetise the user base through ads after that. While Pinterest has bucked the trend till now, it was inevitable at Instagram since its a part of Facebook. They seem to have put in place the right controls to let users choose what kind of ads they want to see and also have a review process to maintain the quality of ads. If they are able to find a scalable process for both of these, ads on Instagram might not become annoying. Just about.