May 4th 2019

Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc. overall business model. Acquired by Facebook for a billion dollar in 2012, today Instagram is integrated into the overall Facebook business strategy. In 2018, Instagram founders, Kevin Systrom and Mike Krieger, left the company, as Facebook pushed toward tighter integration of the two platforms.

Instagram background story

Instagram has been one of the most successful startup stories of the last decade. It quickly turned into a multi-billion dollar company, with millions of users. It is worth exploring some key dates of its story.

A big hairy audacious goal

As Kevin Systrome, founder of Instagram pointed out in one of the first Instagram posts:

When we started working on Instagram, we tried to imagine what the world would be like if everyone could contribute media to an open, transparent, and international community.

This was at a time when Instagram had 80 users! When Systrome announced the photo app in October 2010, he communicated three key problems Instagram was trying to solve:

Source: instagram.tumblr.com

As soon as Instagram launched it reported explosive growth. As Systrom, Instagram founder recounted: “We crossed 10,000 users within hours, and I was like, ‘this is the best day of my life.’ This is amazing, right?” he said. “At the end of the day, it kept growing so much I thought, ‘are we counting wrong?'”

Problem/solution fit

When Instagram launched it was solving three key problems at the time:

At the time phone cameras hadn’t the resolution they have today. And Instagram made it possible to transform low-quality pictures by supercharging them with filters
The company built upon the concept of social media, which had already proved successful, and improved on it by curving its own niche, photo-sharing
It focused on making the platform easy and smooth for users, which allowed them to upload photos quickly and integrate them within other social media platforms

Note: A successful startup has to understand first what’s the problem it needs to solve. In most cases, companies fail to achieve success, because they lack the understanding of the problem. Rather they focus on the solution, as pointed out in the interview I had with Ash Maurya. Therefore, it is important to move from a position of product/market fit, which makes you focus on the product and features you can offer. To a position of problem/solution fit where you actually focus on the definition of the problem, and then, only once you have validated the problem, you focus on the product and its features.

By September 2011 Instagram would reach 10 million users! By the end of 2011, Instagram would reach 15 million users, and its engagement kept growing.

Facebook acquisition and integration

If there is one strategy Facebook‘s Marck Zuckerberg has mastered over the years is the acquisition of wildly successful products to integrate within Facebook.

Facebook acquired Instagram for $1 billion in 2012. As pointed out by the NY Times at the time “It’s a notable move for Facebook, which has exclusively focused on bite-size acquisitions, worth less than $100 million.”

At the time Facebook wasn’t that strong on mobile, and the move to acquire Instagram made perfect sense from that standpoint. As pointed out by Mark Zuckerberg at the time:

For years, we’ve focused on building the best experience for sharing photos with your friends and family. Now, we’ll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests.

At the time Facebook was committed to leaving Instagram independent:

That’s why we’re committed to building and growing Instagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.

On a separate note on the Instagram blog, in April 2012, Kevin Systrome announced:

When Mike and I started Instagram nearly two years ago, we set out to change and improve the way the world communicates and shares. We’ve had an amazing time watching Instagram grow into a vibrant community of people from all around the globe. Today, we couldn’t be happier to announce that Instagram has agreed to be acquired by Facebook……It’s important to be clear that Instagram is not going away. We’ll be working with Facebook to evolve Instagram and build the network. We’ll continue to add new features to the product and find new ways to create a better mobile photos experience.

Just as happened with WhatsApp not long after the acquisition, Instagram changed its privacy policy to allow integration with Facebook products.

Facebook goes all in with Instagram

The integration between Facebook and Instagram proved so successful, that by 2018, Facebook, which makes most of its money from advertising revenues also transitioned successfully to mobile. Which as of 2018, represented 92% of Facebook advertising revenues!

We don’t know exactly how much of those revenues were coming from Instagram, but Recode argues that Facebook might soon rely on the majority of its revenues from Instagram.

Zuckerberg takes over

Fast forward 2018, as Systrome pointed out on a blog post:

We’re planning on leaving Instagram to explore our curiosity and creativity again. Building new things requires that we step back, understand what inspires us and match that with what the world needs; that’s what we plan to do.

While there was no confirmation from Systrom on a clash with Zuckerberg, Bloomberg reported:

Lately, they were frustrated with an uptick in day-to-day involvement by Zuckerberg, who has become more reliant on Instagram in planning for Facebook’s future

Thus, this move makes it clear that Facebook and Instagram were to become tightly integrated.

Instagram mission, and key partners

Our mission is to bring you closer to the people and things you love.

Thus, Instagram emphasizes on creating relationships through visual storytelling. This is the primary payoff for users. However, as Instagram makes money through advertising, it also promises to businesses, willing to advertise on the platform to get “proven results” on the platform.

Therefore, we have two payoffs for the two key partners:

Users: build relationships through visual storytelling
Businesses: advertising their brands and products
There is also a third persona that is a key partner for the Instagram business model, which is the so-called influencer. What does the influencer get? The payoff for the influencer is the ability to build a following that can be resold to businesses ad campaigns to promote their brands