Today, the new path the company is charting has it fighting strong headwinds as users take issue with some of its plans.
Little more than a week ago, Instagram shut off access to Twitter. The company's CEO, Kevin Systrom, defended the move, saying, "Obviously things change as a company evolves."
Big deal or much ado about nothing? That's debatable.
Now Instagram is catching flack from users over changes to its terms of service. Some of these changes, such as Instagram's newfound ability to share user information with Facebook, were expected. But some, such as a provision giving Instagram the authority to use a user's "username, likeness [and] photos...in connection with paid or sponsored content or promotions, without any compensation to you" has sparked a backlash.
Adding fuel to the fire is the fact that, in apparent violation of FTC guidelines, Instagram's updated terms indicate that Instagram "may not always identify paid services, sponsored content, or commercial communications as such."
Why the surprise?
Not surprisingly, the blogosphere is abuzz and some users appear to be genuinely angered by Instagram's move. While it remains to be seen just how many of the upset users will follow through and delete their accounts, it would appear that Facebook's billion-dollar investment is far from a sure bet at this point.
To some, however, the anger is misplaced. After all, Instagram needs to make money, and it wouldn't have been unreasonable for users to expect that the Instagram experience would eventually change as a result.
Alexis Madrigal of The Atlantic is one of the skeptics. "If you want to stop social networking services from exploiting your likeness for advertising, you've got to start paying up," he writes. His logic:
Here's an alternative version of what Instagram could have done before Facebook purchased them. Instagram has, what, 100 million users? If they got $5 a month from 20 million of those users, they'd be looking at $300 million in quarterly revenue. That's a nice chunk of change when you have a baker's dozen employees. You think those guys could split more than a billion dollars a year and call it good. Or hell, make the user numbers an order of magnitude smaller: 2 million out of 10 million users. That's still $30 million dollars a quarter for 13 guys.
With that quarterly revenue of $300m, or $30m, Instagram wouldn't have needed to accept Facebook's billion-dollar acquisition offer, and it wouldn't need to turn its users into products.
But was that ever a realistic path? It's easy to suggest that services like Instagram could convince a meaningful single (or double) digit percentage of its audience to pony up for a monthly subscription, but there's little evidence that this is easy to pull off. If it was, Facebook and Twitter would have done it, right?
Don't hate the player, hate the game
Consumers like 'free' and to become popular in the first place, companies like Instagram provide a compelling service at the compelling price of $0. Eventually, when it comes time to deliver a return on investment, they turn to advertisers to monetize their vast audiences. So everything, including user experience, user data and user likenesses, has to be on the table because advertisers don't want a bunch of banner ads. They increasingly want native advertising units, so companies like Facebook and Twitter have obliged with ad offerings like Promoted Posts and Promoted Tweets.
That, put simply, is the name of the game. Instagram's Systrom may be apologetic while playing the our-terms-were-misunderstood card, but when he says "our intention in updating the terms was to communicate that we'd like to experiment with innovative advertising that feels appropriate on Instagram," he leaves out the obvious: the test subjects are often going to be the users themselves.
Are advertisers making a mistake?
The big question is whether advertisers are deluding themselves by thinking these "innovative" native ads, including formats that leverage user data and content, are really going to provide effective engagement on services like Facebook, Twitter and Instagram.
Wil Wheaton, who doesn't use Instagram, pondered the implications of the company's terms of service change in the context of how it might impact celebrities:
If someone Instagrams a photo of Seth Green walking through an Urban Outfitters, does that mean Urban Outfitters can take that image and use it to create an implied endorsement by Seth? What if the picture is taken by a complete stranger? Who gets final say in how the image is used? The subject, the photographer, or Instagram?
These questions may be of greater interest to celebrities, but they're certainly relevant to everyone. Which should be of interest to advertisers, who as they go 'native', will find themselves caught in the middle of the struggle between companies looking to monetize usage of their services and users who have very clear boundaries on the price they're willing to pay for 'free.'
Promoted Posts and the like may be attractive to advertisers looking to crack the nut that is social and jump on the native advertising bandwagon at the same time, but inevitably, it's clear that they'll have to come to grips with the fact that users have strong feelings about experiences built around their content.
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