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How Instagram Makes Money

(investopedia.com) – By ELLEN SIMON Updated Feb 7, 2021

In April 2012, when Facebook acquired the photo-sharing app Instagram for around $1 billion in cash and stock, many Wall Streeters were puzzled. At the time, Instagram was less than two years old, boasted an employee workforce of 13, and had no revenue.

In 2019, Instagram generated $20 billion in advertising revenue, according to Omnicore, a direct marking agency. About 69% of America’s marketers planned to spend most of their 2020 influencer budget on Instagram.

According to a Bloomberg Intelligence report, Instagram was worth $100 billion by 2018. It had more than 500 million active daily users.

In other words, Facebook got a cash cow for a chicken feed price.

Instagram’s Strengths

Instagram has several things going for it that are worth their weight in gold to advertisers, according to data compiled by Omnicore in early 2020:

  • It attracts a youthful audience. About 72% of teenagers use Instagram, and 73% of them say it’s the best way for brands to reach them with promotions.
  • Its users click on links. About 130 million users tapped on a commercial link for more details on a product.
  • Its users actually want to see advertising. About 70% of shopping enthusiasts say they turn to Instagram for “product discovery.”
  • Its audience is global. About 89% of Instagram users are outside the U.S.

KEY TAKEAWAYS

  • Facebook bought Instagram for about $1 billion in 2012. By 2018, it was worth an estimated $100 billion.
  • Like Facebook, Instagram makes its money from advertising.
  • Instagram’s strengths include its young and global user base.

Instagram and Facebook

In 2019, more than 98% of all Facebook revenue came from advertising. For the full year, it collected $69.7 billion in advertising fees, and a hefty portion of this income came directly from Instagram. Although separate figures are not reported, analyst research suggests that advertising growth on Instagram exceeds that of its parent.

In fact, according to Merkle’s Digital Marketing Report, advertising spending on Instagram grew 177% for the year ending in the second quarter of 2018, compared to only 40% growth for Facebook over the same time period.

Ad Impressions on Instagram

Furthermore, impressions for Instagram in the same quarter grew by 209% year-over-year, versus a negative 17% growth for Facebook.

An ad impression is recorded when a user of a site views a page that includes an advertisement. In the internet marketing world, ad impressions are good, but ad clicks are better. A click on an advertisement is a positive user response to go to the advertised product’s site.

Needless to say, ad impressions are seen as a leading indicator of ad hits. The more people see the ad, the more hits it is likely to achieve.

The Inexorable Growth of Mobile

Instagram thrives mainly due to its devoted and growing mobile user base, which surpassed one billion in June of 2018, at a time when Facebook’s mobile phone presence was radically lower.

Since that time, mobile has been a growing segment of Facebook’s advertising, accounting for 88% of its ad revenues in 2017, versus 83% in 2016.

A Visual Medium

When Facebook bought the app, Instagram was strictly about image-sharing. Within a year, video capabilities were added.

Advertising on Instagram is becoming increasingly sophisticated. One feature lets advertisers display slideshows and link to sites outside Instagram. Its carousel ads facilitate multi-page print campaigns on mobile phones. That type of brand advertising has thus far eluded some of Facebook’s biggest web competitors, allowing Instagram to win a significant part of the market.

Instagram is often referred to by its users as “IG” or “Insta.”

Like many big names in social media, Instagram started out as a fun idea without a clear path to profit. For Instagram and Facebook, advertising has become the monetization model.

Because it is fundamentally a visual app, Instagram is a natural platform for branded advertising. And as computing moves away from the desktop, especially among millennial users, Instagram is well-positioned to be the dominant platform for advertising in the 21st century.

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