Why Instagram Will Make Facebook Bundles of Money

Evan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The picture-sharing application Instagram is riding a wave of good times.   Bought out by Facebook (NASDAQ: FB) earlier in 2012, Instagram has been enjoying skyrocketing growth, and Facebook is certainly on track to benefit from the seemingly bargain-rate $1 billion acquisition of Instagram.

Instagram’s small team is in a much better position now than it was last year, and they are probably content with the “fame” part of “fame and fortune.”  But, Facebook is accustomed to gaining both parts of the equation, and is now searching for a way to monetize Instagram without angering its user base.

Although Facebook is still struggling to establish a strong fiscal presence after its post-IPO flop and has arguably done more wrong than right in 2012, the buyout of Instagram is certainly going to help Facebook make money.  Instagram will end up giving Facebook a great return-on-investment.  The technological marketplace is shifting to mobile platforms in droves.  It is reported that by the end of this decade, more people will use the Internet almost entirely through their mobile devices than they do their desktop or laptop computers.  Facebook will make bundles of money off of the Instagram acquisition once it finds a coherent way to monetize usage – and Facebook is fast approaching that threshold.

The Current Problem

Currently, Instagram usage is soaring – but the profit margins are not.  Facebook still needs to figure out a way to make money off of Instagram without turning off Instagram’s vibrant user base.  In fact, Instagram’s user base is so vibrant that other companies are utilizing the service to make money off of Instagram!

A short time after the Facebook IPO launch, I wrote an article entitled “’Dislike’ - 7 Reasons Why the Facebook IPO has Collapsed.”   In that article, I pinpointed seven reasons why Facebook’s stock was at that time languishing.  Several of those reasons apply to Facebook’s current situation with Instagram.  The problem actually isn’t with Instagram – Instagram is certainly doing just fine – the pitfalls are with the underlying company structure and fiscal situation of Facebook.

The Instagram situation is simply another plain indicator that Facebook is as popular as ever – but still not sure how to transfer that popularity into cold, hard cash.  Facebook is still an overvalued stock, and its stock price’s decline reflects that.

The Proposed Solution

Facebook has proposed solving the monetization issue by doing what it does best – advertisements.

Actually, Facebook has not formally said that they will be putting up ads on Instagram – but it is strongly suspected that they will be doing so.  Users have revolted against this possibility, but in actuality, the move might make Facebook a lot of money.

According to analysts, Instagram's monetization through ads would, at current usage rates, generate $500 to $700 million over the next three years.  Other monetization efforts could entail a paid, ad-free version of Instagram, which could bring in even more money from consumers who dislike advertisements.

In my earlier article about Facebook, one of several critiques I offered said that Facebook doesn’t have a tangible product, and that the “product” of advertisements is something nobody really likes.  Ads are viewed as a nuisance by a lot of consumers.  But, now Facebook has a tangible asset to be a piece to the puzzle of marketing itself to people – digital memories and pictures on Instagram.  If Facebook can develop a winning formula to generate revenues while keeping users happy instead of charging the company’s doors holding torches and pitchforks, then the sky is the limit for what Instagram can do for Facebook.

The Competitors

Instagram isn’t the only photo-sharing service competing for supremacy.  Yahoo! (NASDAQ: YHOO) is also jumping onto the photo-sharing bandwagon, updating its Flickr platform with a new, chic look.  This competition from Yahoo won’t put much of a dent in Facebook’s plans, at least for now.  This new update should be kept tucked away in the minds of Facebook’s staff as Yahoo has staged a comeback since the hiring of former Google executive Marissa Mayer as Yahoo’s new CEO.

Instagram itself is locked in a fierce battle with social networking giant Twitter.  The two tech companies are at loggerheads over platform compatibility issues and are warring to gain control of a fast-growing mobile marketplace.  This competition from Twitter will push Instagram to continued success, but can also work against Instagram if Twitter gains a larger foothold than it already has in the mobile market.

Perhaps an even larger threat to the continued success of Instagram is a potential assault from Google (NASDAQ: GOOG).  Google has recently bought out the mobile app developer Nik Software, which means that Google now owns Instagram competitor Snapseed.  While at first, this may not seem to be a monumental development, one must explore the implications in relation to Google’s growing social network, “Google+”.

Google+ has recently become a hub for photographers, and the social network is growing at a steady pace.  Now that Google has access to photo-sharing software, the company is integrating that software with its already popular Google+ social network.  Snapseed has had a very warm reception from its core group of users.  This is the last thing the Menlo Park, California based Facebook needs while trying to engineer a company turnaround.

Conclusion

The success of Instagram has given us as investors a “snapshot” into the current state of the tech industry.  Mobile usage of the internet is fast outpacing desktops and laptops and is opening up a new frontier for tech companies.  Facebook’s acquisition of Instagram is an important step for Facebook moving forward.

Instagram usage is skyrocketing, and when Facebook finds its way to monetize that usage, Instagram will bring in a lot of revenue.  Instagram is the largest player and their competitors have yet to make major inroads into the massive potential of the photo sharing market.   However, Facebook needs to keep its eye on Yahoo and Google and continue to balance the happiness of Instagram’s users with the need to generate revenue.


EvanBuck has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus