Instagram: Big, bad, and ready to make money

July 9, 2014, 4:00 PM UTC
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The photo-sharing social media service has a fast-growing, hyper-engaged user base that advertisers love. Now it just needs to figure out how to make money for corporate parent Facebook.

A half-dozen photographers kneel in the middle of a cobblestone street and aim their smartphones at a man holding a string tied to a red, helium-filled balloon. As they frame the photo on their camera phones, Karston “Skinny” Tannis ambles over to size up the shot. The late-afternoon light is perfect, and a breeze blows the balloon slightly to the right. A taxi turns into the street behind the man with the balloon, and just when he should probably move to avoid being hit, the crew starts clicking. Skinny waits, however, and when the action dies down, the road mostly clear, he snaps one photo of the man, balloon just slightly off-kilter, as he tells me, “That’s the perfect shot.”

Photo from instameet in Greenpoint, NY. #thatnycmeet. May 2014 Photo from InstaMeet in Greenpoint, Brooklyn. #thatnycmeet. May 2014@samthecobra

The scene isn’t part of a professional photo shoot or an art project. Skinny and the 150 or so other phone-toting hipsters who are meandering around Greenpoint, Brooklyn, on this sunny Saturday in May are united by one thing: They are hardcore users of Instagram. Since the addictive photo sharing service was invented four years ago, Instagrammers like Skinny have been attending grassroots meet-ups to share techniques, take pictures of one another, and basically supplement their social media with a bit of old-school socializing.

In an attempt to harness this enthusiasm, Instagram has begun calling on its corporate blog for the occasional worldwide “InstaMeet.” This was the ninth global gathering; on the same day, Instagrammers were snapping and sharing photos from London to South Africa. Skinny learned about the Brooklyn InstaMeet from local organizers he follows, who spread the word in the captions of photos they posted. Afterward, the Instagrammers selected their favorite shots, edited them, applied the app’s distinctive filters, and posted them to Instagram with the hashtag #thatnycmeet; at last count, there were 838, at least three of which were added by Skinny.

Skinny, 29, loves Instagram. An account manager at a publishing company, he goes to friends’ Instagram meet-ups nearly every weekend, uploads photos every day, and posts them under the handle @skinnywashere. He has 35,000 followers, which is a lot, but not quite enough yet for him to leverage into making real money. Mostly he’s inspired by his passion. He calls Instagram a “visual diary” that lets him connect to other creative people. First thing every morning he reaches for his phone, eager to see what has transpired on the app while he was sleeping. “I used to do BMX with my friends on the weekend, but now I Instagram,” he says.
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This is exactly the kind of devotion that Facebook generated in its earliest days. That’s why, two years ago, Facebook CEO and founder Mark Zuckerberg paid nearly $1 billion to buy the photo-sharing app. People thought he was crazy. At the time Instagram had 13 employees, fewer than 22 million active users, and no website. Today it boasts more than 200 million active users—almost as many as Twitter—who upload 60 million photos every day. They spend an average 3.7 hours on Instagram every month, according to Nielsen, more time than people spend on Twitter or Pinterest. The acquisition has been a boon for Facebook, helping it connect to younger users. Says RBC managing director Mark Mahaney: “It might turn out to be one of the best deals we’ve seen in the history of the consumer Internet.”

That’s true in part because Instagram has helped spawn a powerful new social phenomenon: Just as Kodak’s invention of a roll of film made it easy for almost anyone to take photographs a century ago, Instagram’s invention of a social feed paired with easy-to-use editing tools makes everyone capable of creating and sharing nuanced, edited pictures today. And that photo sharing has empowered people in powerful, unexpected ways—even those not named Kardashian or Bieber. A 13-year-old professional skateboarder, for instance, can draw a large audience for a practice skate session with one photo posted to his 42,000 followers. And an Oxford, Miss., mom who started using Instagram to exchange photos with her sister has amassed an audience of 530,000. Her photos were so popular she set up a storefront and began selling prints—enough to quit her job. Much as YouTube did for Google, Instagram has put Facebook squarely in the heart of an increasingly important medium for communication.

Businesses are leaping onto the platform. Companies from apparel maker Free People to General Electric have launched their own Instagram feeds, which they say have generated much more user engagement (in the form of “likes” and comments) than other social sites. Patagonia invited climbers to Instagram photos of themselves mountain climbing, tagging them #VIDAPatagonia, and then publish the photos on Others, like Puma, are hiring Instagrammers with large, deeply engaged followings at rates of up to $5,000 a day to capture photos that showcase the company’s products.

Photo from InstaMeet in Greenpoint, Brooklyn. #thatnycmeet. May 2014
Photo from InstaMeet in Greenpoint, Brooklyn. #thatnycmeet. May 2014@ruhul_221

Just about the only party not trying to make money on Instagram right now is Instagram’s corporate parent. It doesn’t need to. Facebook’s revenues jumped 55% last year to $7.9 billion—and not one penny of it came from Instagram. In Facebook’s April earnings call, Zuckerberg said that he thinks Instagram has a lot of room to grow and that it will start to be an important business in the future. But, as he put it, “monetization isn’t our near-term priority here.” In March, Instagram signed its first deal with an ad agency, when Omnicom pledged to place around $40 million in ads on the service.

There’s no guarantee, of course, that the steady ascent in popularity will continue. Instagram’s co-founders, Kevin Systrom, 30, and Mike Krieger, 28, know this. For one, there are myriad technical challenges, from maintaining infrastructure for ever more users to providing support in foreign languages. Also, a host of messaging services like Snapchat and Whatsapp (now also owned by Facebook) have emerged amid a mounting desire for people to share photos privately rather than publicly. The company must figure out how to evolve to meet changing tastes without changing what its users love about it.

Systrom, who serves as CEO, believes Instagram is up to the challenge. He recently hired employee No. 145, and Instagram has just expanded to fill out most of its floor in a building on Facebook’s faux-urban Menlo Park, Calif., campus, where Systrom is within walking distance of Facebook’s leadership team. He acknowledges that expanding—and realizing the economic potential of—his service is no small task. But he counters with a question of his own: Just how many companies have figured out how to nurture a social service to the point that it has an audience of more than a billion people? Before I can answer, he interrupts: “One,” he says. “The one we work at.”

Founders of Instagram, Mike Krieger (L) and Kevin Systrom. Photographed in Menlo Park, Calif. May 2014 Photograph by Robyn Twomey for Fortune

One of Systrom’s new obsessions is flying drones. You can get some cool photos of the world by looking down at it, he points out. It changes your perspective. And so on an afternoon in June, I found myself with Systrom, Krieger, and some other Instagrammers on Stanford University’s campus in front of its 320-foot Andy Goldsworthy stone wall sculpture. Fifty feet above us, a two-by-two-foot Phantom 2Vision+—a $1,299 toy—swiveled its camera to point directly down. Systrom, who towered above the rest of us at 6-foot-5 and was wearing an argyle tie fastened to his blue button-down with a silver tie clip, had linked his iPhone to the drone’s camera, and we peered at the screen. The Goldsworthy sculpture looked like a snake gliding across the lawn. Systrom snapped, snapped, and snapped again.

He didn’t post anything right away. Later that evening, he reviewed the photos. He picked the best one, cropped it, ran it through a filter, tweaked the saturation, and uploaded it, sharing it with his 1.5 million Instagram followers. More than 10,000 people “liked” it. The 175 comments, however, mostly came from Instagram users who wanted customer service on their accounts, a reminder (along with the tie) that Systrom is, after all, the boss.

Systrom wasn’t a photography aficionado before Instagram. He and co-founder Krieger, who is Instagram’s technical lead, originally set out to build a location-based sharing app. Systrom, who grew up in Holliston, Mass., a tony Boston suburb, first met the Brazilian-born Krieger when they both studied at Stanford.

Photo from instameet in Greenpoint, NY. #thatnycmeet. May 2014
Photo from InstaMeet in Greenpoint, Brooklyn. #thatnycmeet. May 2014@kickjamestsc

Like many before them, they hatched their collaboration in a coffee shop. Their messaging app was called Burbn. It mostly let friends say where they were and share a few photos. But early on they discovered that photos were what hooked people. They quickly built a simple photo app and selected 100 people—Apple’s maximum limit for a beta test—to test it. This time, instead of asking their friends to try it, as they had with Burbn, they reached out to two target groups—designers and reporters. They launched Instagram on Oct. 6, 2010, and attracted 100,000 users the first week. It has been among the top 10 most downloaded apps ever since.

Just over a year later, Facebook and Twitter began jockeying to buy Instagram. In April 2011, after reportedly turning down acquisition offers by each of the social media giants, Systrom and Krieger closed a $50 million round of funding led by venture capital firm Sequoia. The plan was to stay independent. But on the Friday that Zuckerberg received the news about the funding, he asked to meet with Systrom. The Facebook founder raised his offer to $1 billion, twice what Twitter had offered. Just as important, he promised autonomy.

Systrom and Krieger decided to take the deal. Systrom spent most of the following weekend at the Facebook CEO’s house for negotiations that were interrupted only briefly on Sunday evening so that Zuckerberg, an avid Game of Thrones fan, could host a long-scheduled viewing party. On Monday, April 9, before Twitter had the chance to make a counteroffer, Systrom and Zuckerberg announced the deal. Instagram’s employees drove down the 101 to Facebook’s Menlo Park headquarters for a tour. From an internal balcony, designer Keegan Jones Instagrammed a photo of his 12 colleagues looking up somewhat bewildered, as if to say, “What just happened?”

Instagram's Kevin Systrom at work.
Systrom, left (wearing tie), in Instagram’s executive suite on the Facebook campus. Photograph by Robyn Twomey for Fortune
Photograph by Robyn Twomey for Fortune

Many people criticized Instagram for selling out so early when the app’s popularity was skyrocketing. But the Instagram team insist that the executives at their parent company have been remarkably hands-off. Krieger credits Jay Parikh, head of Facebook’s infrastructure group, explaining, “Before we got here he told everyone, ‘Don’t bug them. But if they ask you for help, do whatever you can.’ ”

In fact, Facebook has provided tremendous value to Instagram, say Krieger and Systrom. The company leans heavily on Facebook’s spam and fraud prevention team, for example. And Krieger, who is thinking a good deal about management these days, calls regularly on an executive coach Facebook provides to help navigate the sorts of challenges that emerge when your workforce increases by a factor of 10.

The first real test of Instagram’s autonomy came three months after the acquisition. Facebook suggested that Instagram revise its terms of service, allowing the company to access users’ photos for advertising purposes without asking or notifying them. Instagram went ahead with the policy change. The terms were announced late on a Monday, and Systrom and Krieger woke up to a storm of outrage the next morning. They watched as account deletions soared. “That was a scary moment. I thought, Did we just kill Instagram?” says Systrom. Krieger immediately convened Instagram’s executive team, while Systrom met with Zuckerberg, Face- book chief operating officer Sheryl Sandberg, and the legal team. “Let’s roll it back,” Systrom urged them. They tried to persuade him to stick with the change, says Systrom. But he argued that with no immediate plans to add advertising to the platform, it wasn’t worth alienating users. They could revisit the issue later. “It took a while for people to get comfortable with it, but I was pretty adamant that would work,” say Systrom. He published a blog post rolling back the terms of service, and the account deletions stopped. The users had spoken. Instagram had listened. And Facebook had, as promised, stayed out of the way.

Unlike some of its social media rivals, Instagram isn’t given to asking existential questions about the nature of its own appeal. Snapchat hired social media theorist Nathan Jurgenson to study why people take disappearing photos. Facebook works with researchers to inquire as to the psychology of status updates. By contrast, Instagram hands out stickers. The company has a nine-person team that encourages community. It maintains Instagram’s corporate blog, which is as much an industry rag for people like Skinny as it is a vehicle for announcing the occasional business update. When the global InstaMeet happened, the company sent kits to all the organizers it could identify. The kits included a massive red balloon as a prop and a bunch of stickers with the company’s name on them.

So why, exactly, has Instagram become so popular so fast? A survey of academics, photographers, and investors suggests its rise corresponds with a larger shift to a more visual style of communication. People want to share photos to describe their life experiences. This became evident when Facebook bested Myspace, then the dominant social network, in part because its technology made it easier for users to upload and share photos. In 2007 the launch of the iPhone made it substantially easier (and more fun) to take and share pictures. Systrom and Krieger’s service took the evolution a step further.

Graphic Source: The Companies; Nielsen Netview—July 2013

Indeed, beyond the comparison to Kodak’s popularization of photography decades ago (which would apply to smartphones as well as to Instagram), the photo-sharing service has a second analogue, one that may be even more important: iTunes. Where for decades the technical quality of a photo (or the sound quality of a song) gained ever more importance, all of a sudden, with the advent of iTunes and Instagram, the quality of distribution trumped all. To audio purists (and anybody with good ears), iTunes has second-rate sound. But the ease of distribution made it a global hit.

So it was with Instagram, with a twist: By adding simple editing tools like filters, Instagram let mainstream web users become—or at least do an impression of—good photographers. Regular people were now able to manipulate their photographs to reflect ideas and feelings.

Many professional photographers were horrified. Suddenly anyone could be a photographer. What’s more, Instagram helped take jobs from the professionals. Last year the Chicago Sun-Times fired its entire staff of photographers and trained its journalists to take and edit photos on their iPhones and upload them to the appropriate social feeds. It’s not that its reporters were transformed into Margaret Bourke-Whites, but Instagram’s tools allowed them to be adequate at very, very low cost.

Today many professional photographers are finding that Instagram can be a good way to promote and complement their work. One example is David Guttenfelder, a veteran photojournalist who has traveled the world for the Associated Press, winning a World Press Photo Award seven times. In 2013, when he got access to North Korea to spend a year chronicling the lives of everyday citizens, he began publishing a portion of his work on Instagram. His feed, which now boasts 349,000 followers, became a repository for photos snapped quickly of small curiosities. Time named him the 2013 Instagram Photographer of the Year.

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Systrom and Krieger think all of this is cool, but they are mostly focused on making Instagram work really well and very fast. Systrom gets visibly excited when discussing things like latency, the time delay between when you summon your photo stream and when it appears. Over the past three months the duo has cut the time it takes for an image to render by two-thirds. For a communications platform to work, it needs to be absolutely reliable all the time, and dependability and ease of use were big reasons Instagram took off rather than early photo-app rivals such as PicPlz and Hipstamatic. “It came down to a simple, clear product built for speed of sharing, and the laser focus on a single-use case, sharing photos with friends, allowed it to spread easily,” says Taylor Davidson, a professional photographer who is also a venture capitalist investing in photo-related startups.

In a hotel lobby in downtown Austin, skateboarding legend Tony Hawk whips out his iPhone to show me the photo he’s just uploaded to Instagram. In six hours the X Games will start, and he has captured a skate ramp set up in front of the Texas Capitol, perfectly framing the building. So far it has more than 25,000 likes.

Hawk was one of the first celebrities to embrace Instagram. He found it on his own in 2011 by checking out what the teenage skateboarders he coached were using. Hawk, 46, has 1.4 million followers. Unlike many other celebrities, he controls his own profile and takes most of the photos himself. Instagram has become his primary marketing vehicle for his events and his announcements about Activision’s line of Tony Hawk videogames. “Initially Activision would kind of get annoyed with me if I let it slip on Instagram before a game’s launch was announced,” says Hawk. But his accidental marketing seemed to work. “Now they encourage it,” he says.

As with most of the advertising on Instagram right now, the company doesn’t profit from Hawk’s success directly. Despite significant advertiser demand, it has been slow to roll out its advertising products. Systrom says he and Krieger don’t want to screw anything up by moving too fast. The company finally launched its first sponsored-ads product last November by testing 10 campaigns. In Facebook’s most recent earnings call, COO Sandberg pointed to the success of one campaign for Levi’s, which featured pictures of denim clad people in gorgeous outdoor locations. The ad targeted Americans ages 18 to 34 and reached some 7.4 million people, according to Facebook. Sandberg held it up as a success, saying that it “drove a 24-point lift in ad recall, which was three times the control group.”

Photo from instameet in Greenpoint, NY. #thatnycmeet. May 2014
Photo from InstaMeet in Greenpoint, Brooklyn. #thatnycmeet. May 2014@jerm_cohen

Early marketing efforts often achieve outsize success on social media because the advertising takes users by surprise, and they pay attention. But Systrom is putting unusual emphasis on quality so as not to alienate his users. In choosing its first 10 advertisers, Instagram was careful to select brands that would appeal naturally to Instagram’s audience. Systrom personally reviews every ad designed for Instagram, and he isn’t shy about offering critiques. When Airbnb advertised on the site recently, Systrom initially sent the proposed photographs of exotic Airbnb locations back to his team, asking them to make better use of the location feature on the caption to indicate where a photo was taken. “I thought they could get more out of it,” says Systrom.

A host of companies have sprung up to offer advertisers ways to reach Instagram’s audiences. Some, like the New York–based Mobile Media Lab, match big brands with popular Instagrammers, many of whom are amateur photographers who have amassed followings larger than 100,000. Others, like San Francisco’s Pixlee, provide the data analytics to help brands like Ugg identify user-generated photographs that feature their clothing and determine which will portray their brand most positively.

And like Hawk, many brands have built successful Instagram feeds of their own. Erika Bearman, senior vice president of communications for Oscar de la Renta, has a following of 345,000 fashion lovers, and last summer the company released its fall ad campaign—which typically makes its debut in the pages of Vogue or Elle—on Instagram. The company published seven images, and each amassed 1,000 likes within the first hour. In the caption of each image, Bearman prompted followers to preorder the collection on Bearman says anecdotal evidence suggests the campaign was successful. The company plans to repeat the process this fall.

Social media properties can often be like nightclubs. They’re cool while the trendy people are there, and they disappear without leaving a trace. The ones that last somehow transform themselves from a vehicle for entertainment to a utility. Even if users stop loving it, they still need it.

Facebook, so far, has managed to pull off that trick. But Zuckerberg is still hedging his bets, and Instagram isn’t his only alternative. Facebook has moved to a multi-app strategy. The company has launched several new apps, none of which has become a hit. In February it agreed to pay the astronomical sum of $19 billion to buy the fast-growing mobile-messaging service Whatsapp, which already boasts 455 million global users. And in March it agreed to pay $2 billion to buy Oculus Rift, a virtual reality headset company. If Instagram doesn’t hit it big, perhaps one of the other bets will.

Systrom and Krieger are highly attuned to the peril of shifting tastes. Even as Instagram’s user base continues to grow, they’re sprinting to develop new products that broaden its appeal. “I believe we’re in the midst of a privatization phase,” says Systrom. This shift can be seen in the rise of apps like Snapchat and Whatsapp, which let users manipulate and share images with smaller audiences. “It’s not a technological shift, but a sociological shift, and we’re responding to it,” he says.

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Instagram offers a feature that lets users make their accounts private, and as newer cohorts of people have signed on to the service, slightly more of them are using it. And in December, Instagram launched a private messaging product. Most of the tech press wrote it off quickly, but data suggest that momentum is building. According to Instagram, over the past month 45 million people, or roughly 25% of its users, sent or received a direct message on the service.

The company has had less success with its 15-second videos, which launched shortly after Twitter’s Vine videos became popular. Though Systrom says Instagram has been happy with it, the company won’t release information about how many people are using video, and two sources close to the company suggest it has been disappointing. In a sense the company’s blessing may also be its curse: It has built its reputation on letting its users do one thing extremely fast and incredibly well.

Despite his concerns, Systrom believes that if the company can maintain that standard of execution, it has tremendous growth ahead. Meanwhile the allure of the core product continues to hook people like Skinny, who has checked it daily for three years and can’t imagine stopping. “It’s a little bit of a peek into someone’s psyche,” he says of Instagram’s appeal. How much would an advertiser pay for that?

More as-told-to and video profiles of successful Instagrammers:

Joel Strong: Adding Leonardo DiCaprio to every party
Anthony Danielle: How a hobby became highly profitable
Ali Jardine: From stay-at-home mom, to full-time Instagrammer
Shantell Martin: An artist finds her visual voice
Dave Krugman: Bringing art outside of The Met

Gallery: Portraits of an InstaMeet

Research Associate: Akosua Nyantakyi