Instagram probably will not reach the billion users to which Mark Zuckerberg aspires, but that’s not necessarily a bad thing for Facebook’s revenue prospects. At full maturity the platform will be much larger than Twitter, and a maturing growth profile should motivate Instagram’s management to accelerate its monetization efforts.
Based on current growth rates as shown below, Instagram will level off at roughly 650 million monthly active users (MAUs) by 2020. This level would hardly constitute a failure, as only a handful of social networks have hit more than 500 million MAUs and only FacebookFB has crossed a billion. With 650 million young and engaged users, Instagram would be one of the largest and most lucrative destinations for advertisers.
The logistic function depicted in the graph above plots out an S-curve, capturing the three phases of technology diffusion: exponential growth at the beginning, linear growth in the middle, and logarithmic growth toward the end. Research analysts have used it to predict smartphone penetration in the US with good results. Plotting a best fit curve for the six data points Instagram has released, the logistic function suggests MAUs will reach 650 million by the end of 2020.
This projection is just that: social networks are not obliged to follow a mathematical function. Instagram’s ultimate size will depend upon product innovation, competition, and numerous intangibles. That said, in our view, the logistic function has a better than average track record in predicting the adoption of social networks.
Mark Zuckerberg has stated that social networks aren’t really interesting monetization opportunities until they reach a billion users. Why then has Facebook opened Instagram to all advertisers this year? It could be accelerating monetization precisely because it believes that Instagram won’t hit the one billion MAU mark… or the goal could be more aspirational. Facebook itself was monetized well before it reached 500 million users.
With 650 million users, how much revenue would Instagram generate for Facebook? In the table below, we lay out potential revenue as a function of MAUs and average annual revenue per user.
Twitter currently generates roughly $5 per user per year1. At that level, Instagram would generate between $3-3.5 billion in revenue. At Facebook’s monetization rate of $10 per user, Instagram’s revenue would be double, or $6-7 billion. If Instagram were to outperform Facebook, not an outlandish assumption given its substantially higher engagement, it could generate revenue on the order of $10 billion, four times that of Twitter or 63% of Facebook’s trailing four quarter revenues of $15.9 billion. Compared to the projected size of the digital advertising market in 20202, $10 billion would account for only 3% of that market.
This analysis assumes that Instagram follows the growth curve predicted by the logistics function. In reality growth may taper early or gain momentum. We’ll be updating this model as Facebook releases new numbers. Follow us on Twitter to stay up to speed.
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