Facebook: Instagram Stories Is A Big Move

| About: Facebook (FB)

Summary

Facebook launched Instagram Stories, and it is essentially a mirror image of Snapchat Stories.

How relevant does Snapchat remain if Instagram replicates its core feature?

Snapchat's demographic moat (older audiences don't use it) will wither with time, as no social media app maintains an exclusively young demographic forever.

Long term, this move positions Instagram to consolidate its user base and mitigate competition.

In response to upstart social media platform Snapchat (Private:CHAT), Facebook (NASDAQ:FB) has launched Instagram Stories, which allows users to post photos and videos to a story which will disappear after 24 hours. Looking at TechCrunch's visual walkthrough of Instagram Stories, it looks essentially like a mirror image of Snapchat Stories, the mega-popular feature Snapchat launched in 2013, which has supercharged user growth. Although the move feels defensive, we think it is actually offensive, and favor it on the view that it is another natural step towards consolidating the user base and minimizing competition.

It is no secret that Snapchat has gained significant momentum recently. It is an app designed for the Millennial audience, and as parents, aunts, and uncles begin to adopt Facebook and Instagram, kids are flocking to Snapchat as a safe haven to express themselves without parental oversight. According to eMarketer, 59% of Snapchat's user base is under the age of 24, and that mix is expected to shrink only marginally to 52% by 2020. The anti-parent, ephemeral nature of Snapchat has propelled it to become the most important social media app among teens, according to Piper Jaffray's Taking Stock With Teens Survey.

Even with all of that, Snapchat only has 150 million daily active users to Instagram's over 300 million daily active audience. This discrepancy, though, is to be expected. Instagram is naturally much larger because it attracts younger and older crowds, as well as has much more significant international reach than Snapchat. When looking at the comparable Millennial audience in the US, Snapchat is actually bigger. Research firm eMarketer predicts Instagram will have 48.2 million US Millennial users by year end while Snapchat will have 49.4 million US Millennial users.

Looking at this data, it is easy to label Facebook's move as a strongly defensive one to regain Instagram's popularity among the Millennial audience. We simply don't view it as such. After all, Snapchat barely beat out Instagram as the most important social media app among teens, with 28% of the vote to Instagram's 27%, and the two firms have fairly similar scale when it comes to the US Millennial audience. For all intents and purposes, Instagram remains a growth machine even with Snapchat competition.

But how relevant does Snapchat remain if Instagram replicates its core feature? Roughly 50 million US Millennial users for each platform implies a significant user overlap in the US, so many Millennials have both Snapchat and Instagram. Right now, this works because each serves a different purpose, but Instagram's latest feature somewhat mitigates the necessity of having both platforms.

This fits in perfectly with what we have addressed several times before and what industry experts call the app enigma. It is a nearly inevitable trend that app usage will consolidate into a few apps with incredibly diverse functionality. Facebook is doing this in several places, and so it is only natural that the company attempts something similar with Instagram.

Snapchat still has a moat with its demographic. Whichever way you slice it, parents still aren't using Snapchat in droves, and this could keep a good portion of users from switching to Instagram Stories. The difference with Instagram, though, isn't that drastic. Roughly 31% of Instagram's user base is 45 and up while that figure stands at 17% for Snapchat. We argue, though, that with time, parental and older audience adoption of Snapchat will grow. History shows no app maintains an exclusively young demographic forever. Just look at Facebook and Instagram.

As this demographic moat withers, Instagram will consolidate users because there will remain little reason for teens to have both a Snapchat and an Instagram. From this perspective, we think Facebook's move to add Instagram Stories is actually an offensive one, and one that will mitigate Snapchat competition in the long term.

Disclosure: I am/we are 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.