How Facebook Is Already Profiting From Instagram

Ads Don't Run on Instagram, but Its Videos End Up as Ads on Facebook Pages

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During Facebook's Q2 earnings call, Mark Zuckerberg alluded to the possibility of advertising on Instagram someday, but hardly seemed hurried.

Considering Facebook's aggressive and successful mobile advertising business throughout the past year, many were surprised he wasn't jumping at the opportunity to profit from Instagram faster. Facebook paid almost a billion dollars for Instagram, so one might expect that advertising would be just around the corner.

Rather than focus immediately on advertising, Facebook recently launched Instagram's new video feature, a competitor to Twitter's darling Vine. Instagram videos record up to 15 seconds of content, a perfect length for mobile ads. Some brands have already recycled old ads as Instagram video.

So why wait on rolling out Instagram advertising, which would compel brands to capitalize on the platform's quickly growing user base?

As it turns out, Facebook can make money from Instagram by charging brands on Facebook, where ad budgets are already growing aggressively, especially on mobile.

It's as simple as this: brands create Instagram videos, share them to their Facebook pages and then boost them into paid media that hits the Facebook Newsfeed, in the same way that they boost text or photo posts. This enables brands to reach Facebook's 818 million monthly active mobile users, which dwarfs Instagram's 130 million. It's profiting from Instagram without having to advertise on Instagram.

Facebook isn't the first major tech company to take an indirect approach toward increasing advertising revenue. Google sunk a significant investment into Google Analytics and then offered the product for free. But ultimately, website managers watch their traffic ebb and flow, decide they want more visitors and pay for ads on Google.

Although Google doesn't make money directly from its analytics product, the product acts as an incentive to distribute ads on websites in the form of Google AdWords. Similarly, Facebook doesn't make money directly from Instagram video, but the engagement that videos get on Instagram acts as an incentive to distribute them as paid ads on Facebook.

Facebook has a history of growing a thriving user base before turning to advertising. When Instagram grows bigger, advertising might ultimately become a direct part of the platform, with many foreseeable opportunities ahead. Beyond native ads within Instagram, Facebook could use Instagram hashtags as a new way to target. Someone who posts CrossFit photos using #crossfit, for instance, might see a CrossFit ad in his Facebook Newsfeed. The two social networks have massive potential to leverage each other for highly effective advertising.

Facebook will have an opportunity to disrupt video advertising by itself if, as rumored, it rolls out 15-second newsfeed spots in the near future. Advertisers then could run both boosted Instagram videos and premium ad videos. The Instagram videos would allow for more active Instagram brands to distribute their content outside of the network in an efficient manner.

The company has yet to confirm this plan. But even it just stays its current course with Instagram, Facebook's strategy turns out to be a win-win for the social-media giant. In the short-term, it can make money from Instagram videos indirectly on Facebook without changing the user experience on Instagram. Down the line, advertising directly on Instagram may become a huge moneymaker, but for now it's all about capturing and sharing the world's moments -- and paying to distribute them on the world's largest social network.

James Borow is co-founder and CEO of SHIFT.

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