Facebook: Instagram Users Up To 100 Million But Where's The Money?

| About: Facebook (FB)

In Spring 2012, Facebook (NASDAQ:FB) acquired Instagram, the photo sharing social network app. This purchase was met with a significant amount of skepticism from critics pointing to a mind boggling $1B price tag and $0 revenue.

In April 2012, just before Facebook tapped on its shoulder, Instagram boasted 27M users. Recent reports indicate the social network now has over 100M users. That would represent astonishing user growth of 270% in just 10 months. Data also shows that Instagram is growing by 10M users per month. To put that in perspective, Facebook only grew its MAU (Monthly Active User Base) by an average of 16.7M per month in the 4th quarter.

This is all great news for Facebook except for one tiny concern; monetization. When it was acquired, Instagram had no revenue and no plans on making any in the near future. Facebook accepted this for several months after the purchase, but then made several tweaks to Instagram's privacy policy. Unfortunately, due to a massive user backlash, Instagram reverted to its old policies.

This policy change attempt was no doubt to increase/establish initial monetization within the app. Specifically, the changes Facebook had tried to make would've allowed them to sell or use/distribute any photographs, without letting its users know.

It's unclear what Facebook's next move will be to generate revenue from Instagram, but it looks like another policy change will have to be made. In the meantime, Facebook is stockpiling more and more user photos/data that could eventually be monetized.

If user growth continues at its January/February pace, Instagram will hit 210M users by the end of 2013 and would have doubled its user base year-over-year. At 210M users, Instagram could potentially be 1/5-1/6 the size of Facebook. It took Facebook 65 months to hit 210M users, Instagram is on pace to do that in just 38 months.

Conclusion

Although it's still muddy how Facebook will extract value from this photo-sharing crowd, it's a blessing that Instagram was purchased. After a harsh round of surveys from Facebook users mainly pointing to declining interest in the service, it's clear Facebook's hyper growth days are behind it. Could this be a delayed reaction to Wall Street enforced monetization effects that started taking place 6-12 months ago? It's hard to tell. (But Instagram policy backlashes would scream "YES.")

The bottom line is, Instagram is rapidly turning into the new 'it' social network. Facebook is lucky they were able to acquire Instagram before anyone else did.

PS

I generally don't include personal anecdotes in my SA articles, but as a college student I find it particularly intriguing to note that several of my friends have 'deactivated' Facebook for Instagram (myself not included).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.