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The Instagram advertising market has exploded in the last five years. According to one estimate, the photo sharing app generated $ 9 billion in revenue for the parent company Facebook (NASDAQ: FB) last year. That's more than Twitter, Break (NYSE: SNAP)and Pinterest combined.
The key to Instagram's success lies in its links with Facebook's ad buying platform. Marketers use the same ad buying tool to buy ads on Facebook and Instagram. They just need to check a box in the ad manager if they want their ads to appear on Instagram. This integration played a key role in helping Instagram increase the total number of advertisers on its platform. eMarketer estimates that 69% of marketers use Instagram, compared to only 28% on Snapchat.
However, despite the turmoil around Facebook, advertisers are transferring part of their advertising budget to the large social network. This is not to say that their advertising budgets on Facebook do not increase, but that they simply do not increase as much as other digital ad platforms. But if marketers do not use as much Facebook's advertising tools, this could also have a negative impact on Instagram's advertising activity, notes eMarketer.
Source of the image: Facebook.
Advertisers follow the returns
The most important thing for advertisers is to maximize their return on investment. How many sales can they get per advertising dollar?
The reason why many marketers plan to spend a smaller portion of their budget on Facebook's main platform is explained by the decline in marginal return on investment. This should not be a major surprise for investors who have been following the company for two years.
There is more room to increase ad impressions in Facebook's news feed. As a result, average prices for news feeds have skyrocketed over the past two years. Add to this a base of users less and less engaged and marketers will get lower returns on their advertising dollars.
What has changed on Instagram?
Instagram remains an excellent opportunity to generate a higher return on investment. The application quickly increases its user base: the number of monthly active users rose to 1 billion last summer, compared with 800 million in September 2017.
More and more US teens – a valuable demographic for marketers – are now using Instagram instead of Snapchat, and the gap between the two for the most popular social media app for teens is also shrinking. According to a recent Cowen poll, 61% of marketers believe that Instagram is the best way to reach Americans between the ages of 13 and 34.
Just because marketers spend less of their budget on Facebook ads does not mean that their demand for Instagram ads should be affected. In the Facebook ad buying tool, it is in principle only another check box. Marketers should check this option if they only want ads to appear on Instagram. Nothing changes a lot.
The advertising transition of Facebook
Investors will be listening and will be seeking feedback on Instagram's advertising activity throughout 2019. They will particularly want to see the comments on the Stories ads.
Facebook's management said its advertising sector was running news feed ads to story ads. News feed ads are well monetized and marketers know how to maximize their value. The story ads are still new and neither Facebook nor the marketers really understood how to make them as effective as news feed ads. As a result, marketers are not willing to pay as much for Stories ads as news feeds … yet.
Instagram Stories is currently the biggest Facebook opportunity for Stories ads. The feature counts 400 million daily active users, and it is highly concentrated among American teens. The other Facebook Stories products are more global.
Facebook's fourth quarter financial report at the end of the month will provide the next investor insight into the transition to more Instagram and Stories ads. Look for modest growth in the average price of ads, surpbaded by the growth in the number of impressions, which Facebook has highlighted during its transition to news feeds and mobile ads. Hopefully the direction will provide us with detailed information on Instagram advertising activity or detailed information on Stories ads.
Adam Levy owns shares of Facebook. The Motley Fool owns shares and recommends Facebook and Twitter. Motley Fool has a disclosure policy.
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