Instagram's Omnicom deal is the first step on its path to exceeding all ad expectations

By James Robinson , written on March 10, 2014

From The News Desk

Within four months, Instagram has transitioned from a no-revenue, high-potential asset into an ace up Facebook's advertising sleeve. The photo-sharing platform has been forecast quietly to record between $250 and $400 million dollars in revenue this year. On Friday afternoon it announced that it had already pencilled in a large chunk of that, with a deal signed with Omnicom offering up access to its paid advertising program for an undisclosed amount.

Initial excitement pegged this deal as being worth $100 million. In reality, it shook out closer to $40 million. Either way, it was the first headline in what should be a very lucrative year for the photo sharing platform. If continued to be handled well, Instagram is set to transition to profitability in record time and with little growing pains.

Instagram has been forever pegged as having only boutique potential as an advertiser. But all the numbers coming out now point to a much rosier future. It got to 150 million users twice as quickly as Twitter. If revenue comes in at the high end of the current forecast, it will be more lucrative than Twitter was in 2012 and at a much earlier point in its history.

Friday's deal showed off Instagram's leverage, even in these early days. In the deal, Omnicom essentially purchased a whack of space on Instagram to advertise for its clients - such as Nissan, AT&T, Bud Light, Pepsi. But Instagram kept the upper hand in still retaining approval of who gets to come on. The company was quick to assert that it will work hand-in-hand with all advertisers who come onto the platform, to assure that the quality of the ads remains good.

Instagram's user-base is an engaged, sweet spot of advertiser friendly demographics: trending wealthy, young and female. According to data from L2, a New York based analytics company, it has a 1.53 percent engagement rate - 15 times higher than Facebook and nearly 40 times higher than Twitter. It grew its user base 66 percent between 2012 and 2013.

The context we use Instagram has also aided this transition to ad advertising model. When scouting Twitter and Facebook, advertisements always cut across the grain of the user experience. Facebook has bridged some of that gap with native advertisements, but I’m still never looking to buy shoes when trying to assess if my friends had a better weekend than I did.

Instagram is almost entirely visual. Until the launch of direct messaging, it was nothing but a stream of edited, filtered images. The entire content stream represents the sum total of your friends and favorite celebrities trying to advertise their own lives. We look at it to distract ourselves with beautiful pictures. The introduction of the first smattering of ads inside this was seamless in comparison. Twitter had to make itself more visual to be advertiser friendly. Facebook had to interrupt the news feed. With Instagram, the ads fit in it like a glove.

The company could still screw the pooch on this. Instagram’s all-native advertising environment will remain powerful, as long as it is protected. Michael Kors, General Electric, Levi’s, Lexus and Ben & Jerry’s have entered early. Close ties between Instagram and Facebook accounts will allow ads to be targeted to relevant users, but the visual nature of Instagram ad campaigns will keep it in the domain of companies that can afford to measure more nebulous things like “brand equity.”

Opening the gates too wide, flooding those photos of your friend pretending to have a better time on vacation than they really are with bad beer ads, could be disastrous. The company has looked to be careful. Last month it published a hardcover book with advice for brands that want to advertise on its platform. And it has the added advantage of looking to make more money from a smaller pool of advertisers by presenting itself more like a traditional media campaign. Features like auto play videos will allow Instagram to try and chip money away from big-dollar TV budgets.

If Facebook and Instagram can keep the guest list reasonably exclusive, this could be end up a giant win. In 2012 people said Facebook had paid $1 billion for a company with no revenue but lots of soul. With the Omnicom deal, we got more proof that the twist in this story is that Instagram’s soul is more lucrative than most people figured.

[illustration by Brad Jonas for Pando]