Instagram is an interesting company. Founded just seven years ago, Instagram was purchased in 2007 for a billion dollars by Facebook. Since then it’s continued to grow dramatically, and estimates now place it at an estimated valuation of approximately $100 billion.
But where does this value come from? Social media is historically valued more by the engagement and adoption of its users than its actual revenue stream, and this has created an interesting new way to look at the industry.
Instagram cofounders Mike Krieger and Kevin Systrom recently stepped down from the company, but this itself may not be as large as concern as their reasons for doing so. The cofounders cited Facebook’s Mark Zuckerberg as the primary reason, and noted Facebook’s repeat meddling in their product.
This may not be a good thing for the product long-term. Though Facebook has remained the major social network in the world for some time, it has also come under widespread criticism due to both privacy concerns and usability issues. As with any free platform, the users of social media are generally the product of social media. This leaves social media companies with a delicate balance: they need to be able to monetize their user base without alienating it. A number of changes Facebook has made to that end has been potentially disruptive to users.
Instagram’s cofounders stated that they are interested in making new products and returning to a more creative role, but it’s important to note that Facebook has put a significant amount of its stake on the Instagram platform. Instagram is fast-growing, and reaches a demographic that Facebook does not. The user base for Facebook is aging, while younger users are moving towards platforms like Instagram and Tumblr. Thus, exiting cofounders at a critical time could leave Facebook in a lurch.
When it’s said that Instagram is worth $100 billion, what does this really mean? Instagram, like other social media platforms, has a revenue center that is primarily based on advertising. Social media is able to collect extraordinary amounts of user and demographic data, which can in turn be used by companies looking to expand their reach. Instagram is used in a few different ways by marketing companies: direct marketing through ads, general demographic research, and through influencers on the platform itself.
Presently, Instagram could account for up to a quarter of Facebook’s advertising revenue, or up to $20 billion by 2020. An aggressively fast growing platform, it may have a significant impact on Facebook’s future. And that could make the cofounders stepping down now a bad thing: Instagram has historically been popular precisely because it is not Facebook. Compared to Facebook, Instagram has an extremely narrow focus, with a streamlined application devoted to photo and image sharing. Feature creep has made Facebook comparatively unwieldy and unfocused.
The loss of creative direction could be bad news for Instagram not only as a general platform, but also in the wake of multiple social media issues. Social media platforms are currently undergoing wave after wave of scrutiny, as privacy issues are encountered, user data is sold, and the effects of fake users and political campaigning have been revealed.
Instagram is a strong platform and it shows little sign of slowed growth. However, investors may need to be wary as it does comprise such a significant part of Facebook’s revenue picture. It is very possible the platform could be damaged by its own success: FB could continue to meddle with the platform to the point of migrating its own issues to it.
The loss of the cofounders is not a good sign, but it does make the way for further innovation if the two cofounders continue to develop. Indeed, investors wary of the influence Facebook currently has may want to watch their new moves and projects with interest.