Facebook Inc – FB Stock Could Benefit From a New Instagram Algorithm

Instagram's biggest change ever will make ad revenue explode

Instagram is about to make a major change to its user interface. The feed of photos that populates users’ apps will soon be sorted by an algorithm instead of reverse chronological order.

Facebook Stock Could Benefit From a New Instagram AlgorithmParent company Facebook Inc (FB) switched from reverse chronological order to an algorithm in 2009, and while it saw a major outcry from dedicated users, it and Facebook stock investors are now better off because of it.

Twitter (TWTR), too, has experimented with different timeline organizations, including its “while you were away” feature, which uses an algorithm to surface the tweets it judges most important since you last signed on.

But when reports surfaced that it would do away entirely with the reverse chronological timeline, it faced a ton of backlash from users. It hasn’t thrown the original user experience to the wolves yet, however, opting instead to give users the choice by switching to “Show me the best Tweets first” in their settings.

So, why is Instagram making this change now?

FB Stock: The Path to 400 million Instagram Users

In an interview with The New York Times, Instagram CEO Kevin Systrom said, “On average, people miss about 70% of the posts in their Instagram feed. What this is about is making sure that the 30% you see is the best 30% possible.”

As more people join Instagram, users have more accounts to follow, which means their feeds become extended. Only the most dedicated users with well-curated feeds will see everything the accounts they follow post. The casual Instagram user is going to miss a lot, which could lead to account abandonment. Needless to say, that would be bad for Facebook stock.

People that are just signing up for Instagram today are much more likely to be a casual user than a die-hard that checks their feed 20 times a day. This change caters directly to their needs by placing the most interesting content at the top of their timeline.

Of course, this is the same approach Twitter took with “while you were away,” but that change failed to ignite user growth or retention according to CEO Jack Dorsey.

The difference here is that Instagram is implementing the change while the user base is still growing rapidly. Twitter’s biggest issue is that many people have signed up for accounts in the past, but abandoned the service after a short while because they never got much utility out of it. Instagram is thus launching a preemptive strike.

Instagram Ad Revenue to Boost Facebook Stock

Outside of promoting user growth and retention, a change to Instagram’s feed could have a tremendous impact on its advertising business.

One way Instagram will boost revenue from the change is by increasing ad engagements. With the most interesting photos at the top of a user’s feed, she’ll take more time to peruse each post, including sponsored posts.

A reverse chronological feed is much more skimmable, and that’s what users tend to do. But when every post is great, users spend more time, and move more slowly. Even an extra second spent looking at an ad could be worth a lot to advertisers and make the difference between a click and a skip.

Second, an algorithm designed to surface the most important posts could reduce the amount of exposure brands receive. Facebook Pages experienced this multiple times in the past as FB tweaked its News Feed algorithm and organic engagement declined. This would allow Instagram to increase the number of bidders on its ad inventory, as brands look to reclaim their engagement.

Instagram is reportedly working on new features for brands such as profiles similar to Facebook Pages, advanced analytics, and the ability to purchase ads directly from mobile. These changes all point toward the expected response to a decrease in organic engagement due to the algorithm it plans to use to sort Instagram feeds.

Some estimates indicate that Instagram could account for as much as 12.5% of Facebook stock’s total revenue this year. While FB doesn’t break out Instagram revenue, Instagram is certainly a driving force behind its continued revenue growth.

The change to its feed should help grow users and, more importantly, improve its average revenue per user. Facebook stock investors should pay close attention to what Instagram says about its feed over the next couple months as it rolls out the changes.

Adam Levy holds no position in any of the companies mentioned.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/facebook-stock-fb-instagram-twtr/.

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