April 24, 2019 / 9:53 PM / 3 months ago

Breakingviews - Instagram is becoming Facebook’s sugar daddy

The Instagram application is seen on a phone screen August 3, 2017. REUTERS/Thomas White

SAN FRANCISCO (Reuters Breakingviews) - Instagram is becoming Facebook’s sugar daddy. The $521 billion social network’s image-sharing unit is a big reason for the company’s strong first-quarter top-line growth. There’s room to wedge more revenue-earning ads into users’ feeds. The risk, though, is the distractions and dodgy content that hamper the “old” Facebook spread to Instagram.

Facebook on Wednesday said revenue jumped 26 percent to $15.1 billion in the first quarter. Mark Zuckerberg can largely thank Instagram for that. It recently added an in-app checkout button for certain brands, with Instagram getting a cut of sales. So-called Stories, which features photos and videos that disappear after 24 hours, are also attracting advertisers. KeyBanc Capital Markets’ analyst believes 50 percent of Facebook’s revenue in 2019 will be driven by Instagram.

The app is also critical to bringing in the next generation of users. Snapchat, Snap’s disappearing-messaging service, is the most popular social-media service, according to a recent Piper Jaffray study of 8,000 teens, but Instagram is the most used. Engagement with Facebook’s original eponymous newsfeed is declining, though, and only 6 percent of the teens said it’s their favorite platform.

Yet as Facebook chases Instagram revenue, it risks alienating users who partly like it because it has its own identity. Ads that intrude on the experience, and the possible proliferation of questionable content, could hurt Instagram’s stand-alone brand. Facebook plans to further integrate Facebook Messenger, WhatsApp and Instagram as part of a push to embrace private networks, and that could blur their differences, too.

Facebook has also lapsed on data security, including with Instagram. In March, the company said it had accidentally stored tens of thousands of passwords of Instagram users on its internal data-storage systems, accessible to employees. Last week, it updated that figure to say millions of users’ logins were exposed. That’s hardly appealing to users. It also can have financial costs: Facebook’s first-quarter profit took a hit because of a likely fine from the Federal Trade Commission, related to data-protection violations, that the company said could range from $3 billion to $5 billion.

There have been questions about Instagram’s direction since co-founders Kevin Systrom and Mike Krieger left Facebook last year. As the company’s overall user growth slows, Zuckerberg can’t afford to let his sweetest product turn sour.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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