Back in April 2012, Facebook (NASDAQ:FB) purchased the photo-sharing service Instagram. Instagram allows users to upload photos and share them with friends, as well as allowing them to use Twitter-like "hashtags" and "likes" to spread the popularity of their respective photography. The website has grown in popularity in the last year, steered by Zuckerberg. The question on everyone's mind, however, is yet to be answered: can it be monetized?
A ripple spread through the internet on December 17, 2012. Instagram announced new policy changes, informing people that they will now be using their photos for advertising. While people on the web may have been hostile about the policy change, the photo sharing network continued to thrive. On January 17, 2013, Instagram announced that it had reached a staggering 90 million active monthly users (Source: instagram.com/press). This press release also stated that Instagram now receives 40 million new photos a day. That's a lot of photos, and a lot of potential advertising revenue. Obviously, people don't care what Instagram does with its data, as long as they get to keep putting filters on pictures.
Instagram will now be sharing data with Facebook, and Facebook will use that data to create more relevant advertisements on its website. While the monetization model hasn't been fully disclosed, expect more of the same from Facebook. The social network will continue to take data from people you know, let you see it, and tell you to "like" a brand or purchase a product. What's different now is the massive amount of additional data that Facebook will receive because of the purchase of Instagram. Zuckerberg must have thought he was on to something big; otherwise he wouldn't have spent $1 billion on a company with 7 people working for it.
Since Facebook plans on monetizing Instagram in a similar fashion to how it has its own website, it makes sense to look at what these ads will be composed of; photos. Instagram is a haven for pictures, and will only grow more popular as time goes on. Facebook uses photos that users put up to align brands with people you know, making you feel more connected to that brand by leveraging real-life friendships. Research firm Infographic Labs compiled data about the social network throughout 2012; Facebook users upload 250 million photos every day. With this amount of photos, Facebook was able to generate $940 million gross profit in Q3 2012. With Instagram, the amount of photos at Zuckerberg's disposal is increasing 19%, to 290 million a day. This will allow Facebook to create ads better suited to individuals, and eventually increase advertising revenue. While Instagram may have seemed like child's play at first, the $1 billion company will push Facebook's monetization model further by directly increasing the amount of data available. I think that Zuckerberg will monetize Instagram, and he will do it well.
Disclosure: I am long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.