Facebook’s Instagram videos poised to take online ad share

Jonathan Ratner 

YouTube likely makes Google Inc. the best way to play the opportunity for roughly US$200-billion in annual TV advertising to migrate online, but with the introduction of video for Instagram, Facebook Inc. could also capture a large share in the future.

Instagram’s 130 million-person user base is now able to post 15-second videos, upping the ante on Twitter’s Vine, which allows for 6-second videos. Instagram also offers 13 filters for its videos, as well as a stabilization technology that will supposedly make videos less shaky.

“The introduction of video will likely make the service more compelling, leading to greater user engagement and also opening the door to lucrative video advertising,” said Mark Mahaney, an internet analyst at RBC Capital Markets.

Facebook does not currently monetize Instagram, but he thinks it can be a solid long term contributor.

Mr. Mahaney highlighted the large opportunity video represents with YouTube expected to generate as much as US$5-billion in revenue this year.

“We think of Facebook as one of the most under-levered names in the Internet sector – it has pulled the least number of growth levers to date,” the analyst said in a research note. “Instagram is looking more and more like a big lever.”

While many advertisers may object to the limitations imposed by Instagram’s 15-second limit, Pivotal Research Group analyst Brian Wieser is confident they will deploy resources to the social network. After all, video is video – an ad format they value very highly.

“Short-format video advertising can allow for a decent balance between the interests of advertisers and users, helping Facebook to more efficiently monetize so many of the small bytes of content that comprise its consumption even if it doesn’t directly lead to significant volumes of incremental revenues,” Mr. Wieser told clients.

However, he considers the introduction of video for Instagram less important than Facebook’s announcement this week that it served one million advertisers in a recent 28-day period.

Earlier in the year, the company said 500,000 pages (mostly small business advertisers) bought promoted posts in the fourth quarter of 2012.

Mr. Wieser believes small business penetration is key to assessing Facebook’s revenue growth and durability, noting that the number of advertisers is more important than the number of users given who pays for advertising and why they do so.

“The long – and short – of it is that new ad products such as video units targeted to existing advertiser segments might generate consumer interest and noise in the press,” he said. “But they will not make anywhere near as much difference in revenue growth as growing penetration into new segments of advertisers, much as Facebook has done with small and medium-sized enterprises over the past year.”