Many baulked when Facebook head Mark Zuckerberg agreed to drop $1 billion on Instagram in April 2012. "That's $33 per user," said some; "there's no business model!" screamed others. Less than three years later and Citigroup now says Instagram is worth $35 billion. That's almost 49 times higher than the $715 million Facebook ended up paying after its stock price fell, and considerably higher than rivals Twitter and LinkedIn. How did things go so right?
The short answer is "ads," as would be clear to anyone using Instagram. The long answer? First, the valuation hinges on Instagram's user count rising 40 percent over the next year, according to Citi analyst Mark May. That's likely -- it rose by 50 percent between March and December of this year alone -- but it's the second part of May's calculations that's up for debate. The analyst believes Instagram will be able to monetize its users further and rake in much more cash from advertisers. But what does that mean for you?
It's been just over a year since Instagram first introduced advertising into its apps, but May's expectations of higher advertising revenues don't necessarily mean you'll see loads more of them. You're worth more to Instagram than ever before -- more than $80 just for being you, according to May's calculations -- and it's unlikely Facebook will suddenly flood your feed with irrelevant ads. Citi thinks Instagram can get $1.48 from ads per 1000 views by the end of next year. That's less than Twitter makes (another service slowly working out how to make money), and May argues that Instagram has a larger, faster-growing, and more engaged audience. Simply put: Instagram is a better fit for prospective advertisers.
Disney's Instagram ads feature high-quality photographs and subtle filtering.
Instead of filling every page with ads, Facebook leverages its vast user data to argue it can target sponsored posts more effectively than others. The company uses your Instagram favorites to work out what kind of ads you'll respond well to, and also takes advantage of the many linked Facebook accounts to target ads based on your profile, likes and interests. It's a tough ask: balancing the demands of advertisers with a historically touchy audience. So far, Instagram has done a decent job of it; you're unlikely to see a jetskiing ad if you're a a 65-year-old man, for instance. You're still helping drive the company's profits by seeing ads, of course, but you're unlikely to be as annoyed by them since they're (mostly) aimed at stuff you like.