• Instagram has now hit the 400 million users mark and in the process surpassed Twitter as the second most popular social media network.
• A huge user base will help Instagram compete better with YouTube as a top video ad platform.
• Instagram is set to soon become one of Facebook's largest growth drivers.

12rf

Instagram has now officially surpassed Twitter (NYSE:TWTR) as the second largest social media network after Facebook (NASDAQ:FB) measured in number of users. When Facebook bought out the photo-sharing site in 2012, Instagram users were pegged at just 40 million. Three years down the line, Instagram has managed to rack up ten times as many users--more than 400 million at the last count up from 300 million just nine months ago. Instagram says in a blog post that the explosive growth has mainly been coming from Europe and Asia, and cements the notion that it remains by far the most popular photo-sharing website out there.

Instagram remains the #1 social site for teens, with 32% of teens using the site according to Piper Jaffray. In sharp contrast, only 14% of teens now use Facebook down from 33% just two years ago. Instagram therefore plays a very key role for FB, by helping the company to net a younger demographic that it would otherwise have a hard time reaching. This is important for marketers who would like to build brand affinity with younger users through Instagram videos.

There are a couple of reasons why Instagram is so popular. The platform is free and easy to use with no need for a complicated help page to get it up and running. Instagram’s photo-editing bell and whistles are completely free to use. And, Facebook’s decision to keep Instagram free of all that ad clutter that is common in other photo-sharing sites seems remarkably prescient. Instagram boasts a clean interface that loads quickly and allows users to focus more on viewing their friends’ photos instead of viewing unsolicited banner ads shoved in their faces.

But where does Instagram fit in Facebook’s scheme of things?

Huge revenue potential

Although Facebook does not use Instagram to display ads directly, it displays Instagram videos on Facebook as paid ads. This allows the company to make money indirectly from the site without diluting its unique user experience. This modus operandi is apparently very successful--eMarketer projects that Instagram will contribute 14% of Facebook’s mobile ad revenue in 2017, up from 5% currently by growing its revenue from $595 million currently to $2.81 billion. eMarketer’s estimate might prove to be a bit conservative since it’s based on the assumption that most of Instagram growth will come from the U.S. whereas Instagram says in its blog post that most of its new users have been coming from Europe and Asia. More than 75% of Instagram users live outside the U.S.

Facebook has lately been introducing Instagram advertising to numerous international markets--30 new countries including Italy, Mexico, India, and Spain will now access Instagram ads. Instagram advertising was previously only available in seven countries.

Competing with YouTube

YouTube is perhaps the world’s largest video platform, and garners billions of views every day. YouTube brought in revenue of $4 billion for Google (NASDAQ:GOOG) in 2014, but could only managed to break even after paying for content costs. YouTube’s ability to make money is hampered by its limited ad targeting--the platform only uses DoubleClick data for ad- targeting. DoubleClick accounts for just 30% of Google’s revenue, which essentially means that Google is left in the dark regarding the preferences of 70% of its audiences.

Google recently decided to start using data from its core site for ad targeting purposes on YouTube. This will make the platform more attractive for marketers and improve the CPM rates of YouTube ads. To compete on an even footing with YouTube, Instagram has to offer a comparable level of viewership as YouTube, and demonstrate to marketers that its videos can deliver an equal or better ROI. That’s the biggest reason why a huge and rapidly expanding user base is a good thing for Instagram.

Facebook recently moved to improve the value proposition of Instagram ads. The company announced that it will start using data from Like and Share buttons to improve ad targeting on Instagram, as I discussed in this article. Facebook wants to make Instagram ads more relevant to audiences and in the process help the ads command better CPM rates from marketers. Marketers are naturally willing to pay more for ads that deliver a better ROI.

Bottom Line

Instagram’s rapidly expanding user base is great news for Facebook.A large user base will help Instagram to become an attractive ad platform for marketers and help it to compete with popular platforms such as YouTube.