Instagram May Begin Making Profit

Instagram May Begin Making Profit

Leah Vetro

With picture-sharing app Instagram gaining more users every day, the creators of the popular nonprofit app are beginning to think of ways to make money off of it. Instagram was created by Kevin Systrom in 2010, and was bought by Facebook in 2012. Since Facebook bought the app, Instagram gained 128 million users by September of 2013 and is now valued at $1 billion. How is it that the app is worth so much, yet hasn’t made any profit?

The spike in popularity shown in the graph above gives creators hope that they can begin to make marginal profit off of their successful app. Instagram is valued so highly because Facebook initially offered $1 billion to buy the app, but they have yet to make profit off of it. Consumers willingly download the app because, for one, it is free, and secondly they have the positive externality of enjoying what Instagram claims to do, “to capture and share the world's moments.” While Instagram users continue to benefit from the app, those who produced it bear the negative externality of making no revenue.

What is stopping Instagram from making millions of dollars? It’d be easy enough to make the app cost a buck to install, however; this cost could cost them their popularity and drive away their targeted market of teenagers. The purpose of making the free app also free of ads for the first few years is to increase the popularity and number of users. Just like how free samples are handed out to draw people in, the intent of the free app is to attract people to the product and get them hooked. The danger in adding a cost to the product is that although Instagram would make profitable gain, the negative externality of the added cost for users could cause them to turn to free substitutes.

Big changes are in the future for Instagram. Do not worry—there are no plans to actually add a cost to download the app, however; director of business and operations Emily White faces the challenge of “how to integrate marketing without jeopardizing Instagram's cool factor.” She fears that advertisements will clutter the environment. When Instagram tried to change the terms of service, the unclear information about advertisers having access to the photos angered costumers and caused the daily number of users to drop by 4 million. Despite the consumers’ backlash, White does believe ads will be a part of Instagram in the near future as long as it is done right. Instagram could also make a profit from charging low subscription fees. They would see plenty of revenue, and customers who are hooked would most likely be willing to pay the extra buck to keep the app.

No matter what the approach, creators of the app have plenty of options to begin to make profit. What is left to decide is how they will find a way to ensure the marginal costs do not outweigh the marginal benefits. If the cost of customer satisfaction is of less importance than the expected millions of dollars in revenue, it is up for the creators to decide—will it be worth the risk?

Works Cited

"How Instagram Can Make Money — Without Alienating Users." Knowledge@Wharton. Wharton School of the University of Pennsylvania, 2 Jan. 2013. Web. 23 Mar. 2014. <http://knowledge.wharton.upenn.edu/article/how-instagram-can-make-money-without-alienating-users/>.

Luckerson, Victor. "These 8 Internet Companies Are Worth Over 1 Billion But They Havent Made a Dime." Time. Time Inc., 29 Oct. 2013. Web. 23 Mar. 2014. <http://business.time.com/2013/10/29/these-8-internet-companies-are-worth-over-1-billion-but-they-havent-made-a-dime/>.

Rusli, Evelyn M.. "Instagram Pictures Itself Making Money." The Wall Street Journal. Dow Jones & Company, 8 Sept. 2013. Web. 23 Mar. 2014. <http://online.wsj.com/news/articles/SB10001424127887324577304579059230069305894>.

Spencer, Graham. "A Look Back At Instagram’s Growth As It Hits 100 Million Monthly Active Users." MacStories. N.p., 26 Feb. 2013. Web. 23 Mar. 2014. <http://www.macstories.net/news/a-look-back-at-instagrams-growth-as-it-hits-100-million-monthly-active-users/>.

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