If you're wondering why Facebook would pay $1 billion for Instagram (a company that has no revenue) even though Facebook already has a popular photo-sharing app, the answer is that it's all about advertising revenue.
We chatted with Simon Mansell, CEO of TBG Digital, a company that sells and manages advertising on Facebook. He gave us these insights into how Facebook might make money from its money-losing deal:
1. People can follow and Like brands on Instagram the same way they do on Facebook. Instagram is one of the few social media where people voluntarily subscribe to brands such as Red Bull and Burberry. Brand Pages are enormously important to Facebook, as they're the bedrock and entry-level offering for most advertisers. Adweek adds:
About a dozen brands, including Logitech, are already integrating their Instagram accounts with their Facebook pages through a product released by social media marketing company Vitrue last month. The so-called "tab module" allows brands to import their stream of Instagram pictures directly into their photo-friendly Facebook Timelines.
2. It allows Facebook to copy Twitter. Twitter gets much higher ad rates for its promoted tweets, which appear in users' tweet streams even if they don't subscribe to those brands. Instagram will allow Facebook to insert promoted or sponsored posts into Instagram users' photo streams. "Currently, if people you follow on Instagram like stuff you are not following you would NOT see that they liked this," Mansell says. Facebook could change that so that anything you like appears to your followers that it came from the original source—the advertiser, in this case. If Facebook allowed promoted photos, "people wouldn't think it was weird as they would have started seeing stuff from brands they are not following already."
3. It keeps people addicted to photos on Facebook, and Facebook makes money by selling ads next to users' photo albums. A huge part of Facebook's stickiness revolves around photos. Who wants to leave the site that contains years' worth of family snaps? Instagram was proving so popular that it threatened that photo storage stickiness. Mansell believes this is why Facebook paid $1 billion to acquire the company even though it has no revenue: "Even if it's just 100th of a threat, and they [Facebook] pay 100th of their value, then it kind of makes sense."
4. It hurts Twitter and Foursquare with a single blow. Instagram currently uses the Foursquare's API—the sign-in thingy, in non-nerd-speak—for access and location. Mansell believes Facebook will switch that to Facebook's API. That immediately renders Foursquare less relevant. With Facebook/Instagram users continuing to post Instagram pics on Twitter, the new company will now throw off a stream of data about how far its photos reach inside the Twitter environment. That's data Facebook didn't previously have on the micro-blog company. "This gives them more info on whether they're losing market share to Twitter, that's my theory."
5. It helps Facebook gain local advertisers. "The Instagram/Facebook API creates a lot of location data linked to the identity information Facebook holds, and thus creates new opportunities on the site for advertisers on Facebook to target against. This could be especially interesting for local businesses for example," Mansell says. "They can get more cupcake companies and local retailers advertising on Facebook, and that will be a huge market."
