How Facebook could monetize Instagram

Facebook is not likely in any rush to monetize Instagram since it acquired the mobile photo sharing application last week, but with the app coming at a billion-dollar price tag, the social network is bound to have some ideas on how the service could eventually benefit its advertising business.

Mobile is an area where Facebook does not have a proven business model. In February, the company announced that it would included Sponsored Stories in the mobile feed, but these units are very small and the rollout has been slow. The Instagram app has a lot of potential to attract advertisers since it displays images larger than many of Facebook’s desktop ad units do. But just because Instagram has the space for big ads, the social network is not likely to disrupt the user experience with traditional mobile display units. It would be out of character for the company and could hurt Instagram’s growth.

However, the photo app provides a number of potentially lucrative options that fit in line with the type of social advertising Facebook has favored in the past. We will explore some of those here.

Sponsored Brand Photos

A number of brands, including General Electric, MTV, Red Bull and Sharpie, are already using Instagram to share photos with an audience that might not otherwise connect with them on Facebook. An obvious monetization strategy would involve letting companies to pay for additional distribution on the service. Facebook might decide to implement a model like Sponsored Stories, which are structured ad units that only appear to users who have friends who have engaged with a brand page or app. This would mean brands couldn’t pay their way into a user’s stream unless the user has some sort of connection to the brand.

On the other hand, filters give Instagram photos a similar style that is not very ad-like. It would not be unreasonable for Facebook to allow companies to promote their photos directly within the Instagram feed, even if users don’t have an existing connection to a brand. This would be similar to the premium homepage units on Facebook.com, which don’t require social connections to be displayed but Facebook ensures that ads are in “page post” format so the ad feels more like a part of the service than an interruption. On Instagram, as on the social network, Facebook would likely prevent advertisers from using its units as traditional banners with large calls to action.

Even with restrictions on the type of images brands can promote, Instagram offers large real estate that could be very attractive to advertisers.

Sponsored User-Generated Photos

Many people use Instagram to share stylized photos of their favorite products. Unlike on Facebook or Twitter, where people often post complaints about companies, Instagram photos are mostly positive representations of brands. See examples below of what users are sharing for Starbucks and Converse. Facebook could allow advertisers to promote user-generated photos to their friends, for example including a Like or follow button to help companies build an audience.

Reach Generator

Facebook could serve Sponsored Stories about Instagram within the mobile Facebook feed or on the desktop site. Brands could pay for this distribution as part of Reach Generator, which is a service that allows advertisers to pay Facebook a flat fee to sponsor one page post every day and guarantee a 75 percent reach of the page’s fanbase over a month-long period. Users might see posts as ad units on the side of Facebook.com or within their News Feeds. By incorporating the Instagram feed into this service, the social network could likely guarantee even greater reach, particularly among users who are spending more time with the photo sharing app and less with Facebook.