Facebook Inc (NASDAQ:FB)-owned photo and video sharing platform Instagram last week signed a $100 million deal with advertising agency Omnicom Group Inc. (NYSE:OMC). The deal will allow the Madison Avenue ad agency to place ads for its clients on Instagram. Facebook acquired Instagram for about $730 million in 2012. At the time of acquisition, Instagram had only 15 million users. But today it has grown to more than 150 million active users.
Facebook’s attempt at Instagram monetization looks promising
It is Instagram’s first deal with a major agency. In November 2013, Goldman Sachs analysts Heather Bellini and Heath P. Terry estimated that Instagram will add $240-$485 million to Facebook Inc (NASDAQ:FB)’s revenue in 2014. The latest deal reinforces their estimate. The Menlo Park-based company launched ads on Instagram on October 3.
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Bellini and Terry believe that ads on the photo-sharing platform are a big positive, which Wall Street was already expecting. Mark Zuckerberg has showed his expertise in finding a balance between advertisers’ demand and user experience. Instagram has been adding new features to improve the user experience. In December, the company unveiled Instagram Direct, which lets users send videos/photos directly to a group of followers.
Instagram likely to sign more such deals this year
Instagram said that users will continue to see high-quality photos and videos from select brands that already have a solid presence on the platform. The low ad-load approach would reduce the risk of user alienation. Moreover, Instagram will control ads in the user’s stream to ensure that they remain there for at least a day so that users can see it. According to AdAge, Publicis Group S.A. (ADR) (OTCMKTS:PUBGY) (EPA:PUB)’s unit Starcom MediaVest is also negotiating a deal with Instagram to place ads on the platform.
Goldman Sachs analysts said that the Omnicom Group Inc. (NYSE:OMC) deal has increased confidence that Instagram revenues will be in the range of their previous forecast. The analysts have a $69.80 price target on the stock. Since Instagram is not included in their current forecast, it represents upside potential (upward revision) for Facebook Inc (NASDAQ:FB). Goldman Sachs expects such agency deals to continue through this year.
Facebook Inc (NASDAQ:FB) shares rose 1.23% to $70.66 in pre-market trading on Monday.