Last week, Instagram co-founders Kevin Systrom and Mike Krieger announced their plan to leave Instagram to “explore their curiosity and creativity again.” The social media company, acquired by Facebook in 2012 for $1 billion, is now worth $100 billion according to Bloomberg Intelligence analyst Jitendra Waral. Facebook’s market value today is $480 billion, emphasising how significant their investment in Instagram has become to the overall business.
Following their merge with Facebook, Instagram has grown faster than any other social media service to become fundamental to many users’ lives. So important that in September it was announced that the verb ‘Instagram’ and the adjective ‘Instagrammable’ were added to the Merriam-Webster Dictionary. Twitter’s 330 million monthly active users are dwarfed by Instagram’s 1 billion. Snapchat’s 190 million daily active users are less than half of Instagram Stories’ 400 million. The need ‘to Instagram’ has become unavoidable. Moreover, Vine founder Don Hoffman contends that “Instagram is probably the single most important consumer service to watch in The West. It’s basically a full blown mobile web,” citing examples of ways Instagram has displaced email, shopping and blogging industries. This has translated into Facebook’s growing reliance on Instagram for mobile advertising revenue growth. Instagram has expanded faster than Facebook to drive almost one fifth of Facebook’s mobile ad sales worldwide.
Co-founders Systrom and Krieger have been fundamental to Instagram’s user and revenue growth. Their autonomy over their product’s brand and roadmap were a fundamental clause of the Facebook acquisition agreement. They have accepted the leverage that Facebook provides to access advertisers through ad bundling and shared services but have been markedly restrained when it comes to Mark Zuckerberg and Facebook’s more aggressive advertising push. As such, their resignation comes primarily as a consequence of mounting tensions with Zuckerberg over product direction, TechCrunch reports.
The future of Instagram is now entirely in Facebook’s hands. Zuckerberg has pioneered the monetisation of social media platforms through advertising. After being caught misleading European regulators over linking WhatsApp to the Facebook platform, he has become notorious for bending regulation to expand his profit-making avenues. If the WhatsApp example is any precedent, without Systrom and Krieger’s resistance Zuckerberg will be ramping up advertising to squeeze every bit of revenue available out of Instagram.
The contrary is that Zuckerberg will have to be very careful with his treatment of Instagram and its loyal user base. The user experience on Instagram thrives because of its functional simplicity as a photo and video sharing app, and because unlike Facebook you are not bombarded with ads from every angle. The short-term revenue boost of increased ads will be trivial if it cannibalises long-term growth.
Moreover, Instagram’s product development must now be completely synergetic with Facebook. Advertising space is more valuable on the Facebook platform, and so management will no longer prioritise Instagram features that potentially compete with Facebook. For example, Systrom recently rolled out Instagram TV despite causing a rift amongst Facebook executives for potentially shifting users from Facebook’s equivalent, Watch. Stratechery’s Ben Thompson went one step further, proposing that this may mark a critical juncture for Facebook’s own engagement and growth potential.
“That there appears to be a pressing need — so pressing that Zuckerberg was willing to risk losing Systrom and Krieger — to leverage Instagram to prop up the blue app suggests that usage and engagement for the latter are at best flat-lining, and most likely deteriorating.”
While Facebook’s advertising business is by no means deteriorating, data suggests they are likely relying more heavily on Instagram than in the past. Instagram ads are currently less valuable per impression than Facebook’s, but while Facebook is nearing saturation on its website and mobile spaces, Instagram feeds have seen a recent surge in targeted advertising. Facebook’s ad growth has inflected in the last two quarters while average prices per ad are increasing at decreasing rates, indicating that Zuckerberg has tapped Instagram to lead the company’s overall growth.
In complete control, Zuckerberg is left in a powerful yet delicate position. As mass data breaches and political tensions put Facebook in the spotlight ahead of the US midterm elections, adding autonomy over Instagram will be a significant test of Zuckerberg’s patience and skill as a product leader. “These departures come at a critical time for [Facebook], as it faces multiple significant legal and regulatory issues around the world, and is trying to support growth and margins while investing substantially,” Scott Kessler of CFRA Research said. “We think Systrom’s and Krieger’s departures are a notable negative.” Thankfully, Zuckerberg has proven that he is not the type to let an opportunity this significant sit idly in front of him.
Montaka owns shares in Facebook (Nasdaq: FB)
Lachlan Mackay is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +61 2 8046 5000.
