Instagram and the economics of 'free

86 GlobeAsia February 2013

Technology

t’s an old adage that if you’re on a website and can’t figure out what it’s selling, the product is you. Instagram users found that out the hard way in December

when they received an email informing them of changes in the Terms of Service, which would allow Instagram to sell its users’ public images to advertisers, without compensating the owners of those images.

The change would have effectively made Instagram the largest stock photo business in the world. Needless to say, users were not pleased and a huge furor ensued with some of Instagram’s high-profile users like National Geographic and even Kim Kardashian declaring that they would leave for greener pastures.

Instagram was even sued over the proposed changes and eventually had

to back down from the most egregious clauses, re-adopting the previous language in their Terms of Service as it related to advertising.

The controversy highlights a very pertinent issue in this new internet economy. When the price of everything is free, how does a company make money?

The fact is, of course, that nothing is ever free. A company like Instagram SU

HA

DI

Instagram and the economics of ‘free’

Column Jason F.indd 86 1/19/13 9:03:44 PM

February 2013 GlobeAsia 87

By Jason Fernandes

employs hundreds of employees and spends a small fortune on server maintenance and other running costs. The company was recently acquired by Facebook for over a billion dollars. With numbers like that, it stands to reason that Facebook would seek to monetize the investment. Probably the biggest question confronting Instagram today is how to build a sustainable business without causing a mass exodus of its users. The key for Instagram would be to make the best use of its parent company Facebook and its other properties.

For a company like Instagram, only two real options exist. One is to embrace the freemium model in a manner most palatable to its users, and the other is to pivot and use its photo-sharing application as a loss leader for another business model altogether.

Why freemium might be the way to goThe freemium model might work particularly well for a company like Instagram. Another web app-based company, Evernote, was in the same place Instagram is today, when first crystallizing their strategy. When Phil Libin of Evernote showed his investors upgrade rates over time, he revealed that only 0.5% of Evernote users upgraded to a premium subscription within a month of signing up.

While the standard view is that most users of freemium web services typically upgrade within the first month or not at all, companies such as Instagram and Evernote are likely exceptions to the rule. Libin showed nervous investors that people were more likely to gradually upgrade their subscription over time as opposed to immediately. The fact is that as people grew more comfortable with the app and used it more, there was an increased inertia preventing them from

switching services and encouraging existing users to upgrade.

For people using the service longer than a year, the upgrade rate for Evernote jumped to 8%. The same would likely hold true for Instagram’s users. What Evernote and Instagram have in common (despite tackling very different markets) is that both web apps are habit-forming. As anybody who uses Instagram will tell you, it tends to get addictive. The most obvious means of monetization available to Instagram would be to begin charging fees based on the number, file size or resolution of images that users upload to the service. Several companies already do this, and it appears to be a fairly viable business plan.

The art of the pivotAnother option available to Instagram is to pivot into the stock photo business. While this puts it in direct competition with more established companies such as Getty Images and iStockphoto.com, the sheer volume of photos uploaded to Instagram (over 5 million a day) makes this option viable.

The company’s controversial Terms of Service change seems to suggest that they are thinking along these lines already. Instagram will however, need to find a way to provide their users something in exchange for the rights to their images. A good idea is to enter into a profit-sharing arrangement with its users, whereby if an advertiser chooses to use a particular photo, the

For a company like Instagram, only two real options exist. One is to embrace the freemium model in a manner most palatable to its users, and the other is to pivot and use its photo-sharing application as a loss leader for another business model altogether.

Instagram could also develop a set of ‘premium’ filters and offer them on a subscription basis. Heavy Instagram users might post over a hundred images a week and the app forms such an integral part of their online existence that these users will likely not think too much of paying a few dollars a month for the privilege of premium features.

While companies like Flickr offer features similar to Instagram, they do not have the benefit of being owned by the largest social media website in the world. This means they would likely not enjoy the synergy with Facebook that Instagram could achieve once it is better assimilated into the Facebook family.

owner of that photo gets some sort of compensation for its use.

A more high-risk pivot would be if Instagram were to enter into the offline products industry through integration with the new Facebook Gifts service. The service, launched in late December, allows users to send physical gifts to friends without knowing their addresses.

The service could well be extended to include Instagram-based postcards. Integration with Facebook Gifts would allow the company to use the existing infrastructure within Facebook to provide its users the ability to instantly send a personalized greeting card via regular mail to their friends from directly within the Instagram app.


88 GlobeAsia February 2013

TechnologySeveral companies such as On the Run Tech (makers of Postcards on the Run) and Postagram have already proved demand for the feature.

While this might sound like a radical pivot to some, it really isn’t. Instagram is in the photo business and its name somewhat already implies this feature. When a subsidiary like Instagram is able to leverage the clout of its parent company to enter new markets and expand its service offering, the decision is a no-brainer. Instagram’s parent company has over a billion users who interact with the service on a daily, and sometimes hourly, basis.

A deep integration with Facebook (“It’s Justin’s birthday, click to send an Instagram postcard”) could potentially mean millions of photo cards and a steady revenue stream for the company. The fact is, Instagram could do this better than anybody else.

Unlike the offerings currently available, Instagram has the advantage of a parent company with a massive user base that has probably already ‘friended’ people they would likely send cards to. Instagram’s senders would not need to know the address of the recipient in order to send them a card. The Facebook Gift interface would allow Instagram users to send customized greeting cards directly to their Facebook friends, with the company tackling the logistics of printing and mailing. This makes things very convenient indeed for Instagrammers.

To build on the offline products theme, Instagram’s photos could also be integrated in the Facebook Gifts service as personalized T-shirts or coffee mugs. The hipster retro effect-based images generated by the app would make great art for clothing and other knick-knacks. Instagram could easily share a portion of the profits with the designer of the artwork, thus encouraging more pictures and greater social interaction.

The road to recoveryWhatever Instagram decides about monetization going forward, the company clearly appears to be struggling. According to numbers from AppStats, Instagram has lost nearly half its daily users in the last month. Instagram’s most frequent visitors, the daily user group, dropped to 8.42 million from a high of 16.35 million just a day before the Terms of Service fiasco.

wrapped in a “take it or leave it” contract and users en masse indicated that when faced with the choice, they would chose the latter.

While internet users are generally not opposed to trading away a certain degree of rights for the ability to use a service, they are acutely aware of what constitutes a fair trade and are very suspicious of anything that seems like a betrayal of their trust. Most Instagrammers realized that, at some

These numbers are no statistical aberration. Another web analytics firm, AppData, also released numbers confirming a decline but pegged that decline at 25% of Instagram’s active daily users in the week after the announcement.

While Instagram has retreated somewhat from its position of December 17, it would be a good idea to introduce any new changes in their usage terms incrementally and over time to minimize dissent. Encouraging its users to comment on proposed changes would also help avoid another debacle.

As Facebook ironically learnt with their offering on Wall Street, greed is not good. Instagram would have done well to pay attention. Instagram’s Terms of Service change was a greedy power grab

point, they would have to pay for the service, whether in cash or through some other means.

Instagram’s recent problems stem only from the fact that its users felt that the price demanded was simply too high. Instagram needs to do some deep soul-searching over the next few months and decide on a coherent business strategy, as opposed to stumbling in the dark.

Instagram’s recent acquisition by Facebook certainly changes the equation. They ought to consider the possible benefits of a greater synergy with Facebook. Instagram must choose wisely, however, because companies usually don’t get to reinvent themselves twice.

Jason Fernandes is a tech commentator

and the founder of SmartKlock. SUH

AD

I
