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Why an Instagram Tweak Spells the Beginning of a Multibillion-Dollar Industry

With new tools, Instagram is poised to become an advertising powerhouse.


Last week, Instagram — the image-based social network with more than 300 million users — made a change that barely received notice outside the tech world. It officially switched on its API, or application programming interface, for ads.

The reaction, or lack thereof, was predictable. APIs aren’t generally the stuff of front-page news. On a technical level, the change means that ads can now be posted on Instagram by just about anyone, using online tools that plug directly into the network. On a practical level, it means that the Internet’s newest advertising behemoth is officially open for business. Thanks in part to the new API, Instagram’s current mobile ad revenue of $595 million a year is expected to rocket to $2.8 billion by 2017 — leaving even giants like Twitter and Google in the rearview mirror in the U.S. market.

For marketers, Instagram has long been a coveted target. The network is believed to have passed Twitter and LinkedIn in terms of active users, and to now be second in size only to Facebook (its parent company) among U.S.-based social platforms. Moreover, while growth at Twitter and Facebook is largely plateauing, Instagram expanded at an incredible 50 percent clip in 2014. And its users are considerably younger than those on other major networks: A full 44 percent of people on Instagram are 18-29, versus just 23 percent on Facebook and 33 percent on Twitter.

Reaching those users through advertising, however, hasn’t been easy. Instagram has been famously cautious in rolling out ads. The network began testing the waters with photo-based ads in late 2013, adding video ads last year. These stream by in feeds alongside ordinary photos, distinguishable only by a small “sponsored” disclaimer. Reception was largely positive and initial results encouraging: The visual format helped “cut through the noise,” in ad lingo, and users reported 2.8 times higher recall compared to traditional online ad formats.

But companies had to pay a minimum of $200,000 to purchase these ads, and — in a “Mad Men”-era throwback — orders had to be negotiated individually with a special Instagram sales rep, then forwarded on for final approval. This process allowed Instagram to keep a tight lid on the look and feel of ads, and to ensure that users weren’t swamped with spam. But few businesses had the resources, or patience, to make Instagram part of their ad campaigns.

With Instagram’s new API offering, however, all that has suddenly changed. Ads can now be purchased by just about anyone, using online ad-buying tools offered by official Instagram partners. Rather than negotiating over the phone with a salesperson, businesses can now log onto third-party sites to create, target and place an ad — self-serve style. For marketers, this means the ability to automate and scale the ad-buying process. They can also compare results — apples-to-apples — to digital buys on other networks like Facebook or Twitter, verifying the returns on their Instagram investments.

While these changes might not seem earth-shattering, experts aren’t sparing the superlatives, calling the move “one of the most anticipated moments in the evolution of advertising.” Comparisons have already begun to flow in to Facebook’s original ad API launch back in 2011, which spurred the growth of a $15 billion-a-year ad marketplace.

Indeed, much of Instagram’s ad potential rests in the data treasure trove collected by its parent company. In June, Instagram opened up ad-targeting tools that tap into user data from Facebook profiles. This makes it possible to laser focus ads to a virtually limitless number of interest groups, from twentysomething yoga lovers to baby boomers into RV travel. The network has also souped up the look and functionality of its ads. Special buttons on images now let users “shop now,” “learn more” and “sign up,” while “carousel” ads showcase multiple images at once.

But will opening the floodgates to ads turn off Instagram’s dedicated users — who now post well upward of 70 million images daily — and lead to an exodus to newer, sexier apps like Snapchat? The network is hoping that its slow, careful rollout will help avoid the kind of user backlash that has plagued other platforms. The “native” format means ads look a lot like normal posts — indeed, in trials top-performing ads received tens of thousands of likes from enthusiastic viewers. At the same time, users have the option of clicking “hide this” on unwanted ads. This feedback is used to further refine targeting — ensuring that, for instance, extreme-sports lovers see ads for Red Bull, not Pampers.

Of course, paid ads aren’t the only option for businesses hoping to reach out to Instagram users. A new wave of tools is also making it easier for companies to connect the old-fashioned way — by posting eye-popping images and building a following over time, just like the rest of us. Third-party tools that allow users to schedule multiple posts in advance and monitor comments and likes have long been available for use with Twitter and Facebook. But Instagram was a stubborn holdout. In fact, for years, the most common user request at Hootsuite was to build exactly this kind of Instagram integration. But with recent changes, it’s now possible for ordinary users to queue up posts in advance and launch coordinated campaigns using these tools.

For marketers, this all adds up to one message: Instagram is finally open for business. The network offers an uncommon blend of substance and style — Facebook-powered analytics plus fashion-mag aesthetics. It’s mobile-first (indeed, mobile-only): A key factor, considering that fully three-quarters of Facebook’s revenue now comes from mobile ads. And it’s uniquely positioned to reach young, socially active users. If the network can find a way to keep both users and advertisers happy, it may well be on its way to solving a multibillion-dollar ad riddle in the years ahead.

Ryan Holmes is the founder and CEO of Hootsuite, social media management tools with 11 million users, including more than 800 of the Fortune 1000 companies. Reach him @invoker.

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