Instagram: 100 million users yet no revenue

With an announcement that it has hit 100 million monthly users, Instagram looks to have achieved that magical milestone of critical Internet mass. With so many people using the photo-sharing service, it’s not likely to spontaneously combust and fold any time soon, and certainly not with Facebook as its owner.

But the $1 billion question – which is what Facebook paid to acquire Instagram last spring – still remains: how exactly is Instagram going to make money?

Its first attempt was a disaster. The company’s announcement in December that it was changing its terms of service to allow for the selling of users’ photos was met with a harsh, almost Facebook-ian backlash. Hordes of users, from individuals all the way up to National Geographic, vowed to stop using it. The company reversed course quickly.

Still, Instagram appears to have continued adding users at a brisk pace despite the controversy. It had fewer than 40 million before the acquisition; if it continues on its current pace, it could hit 200 million by the end of this year.

Management could take this growth to mean that the sound and fury over potentially licensing users’ photos to third parties really didn’t signify much in the end, so it could try again.

Sure, a host of people and perhaps businesses would complain once more and some might drop off, but so what? People got angry and threatened to quit every time Facebook changed its privacy policies, but that didn’t stop it from steamrolling ahead to a billion users.

Yet Instagram is a bit of a different beast, despite its owner. While Facebook has never been very preoccupied with its users’ feelings, Instagram seems to be a kindler, gentler Internet company that does indeed care about what people think of it. If so, the catch is to somehow generate revenue without alienating or upsetting them.

The crux of the angst over licensing users’ photos is the personal value many people attach to them. “Liking” a page or writing a status update on Facebook is very low value – users do it all the time and it requires very little effort. Taking and sharing a photo, however, is different, because it involves an element of creation, some personal choice and possibly sensitive material. Nobody wants pictures of their kids sold to advertisers, for example (at least not without getting a cut).

Not many Facebook or Instagram users consider their photo sharing to be art, but by creating an image and then choosing to broadcast it to the world, it is in fact a form of artistic expression. Whether they can articulate it or not, this is part of why so many are repulsed by the idea of these services selling their pictures.

Image recognition technology the key?

The key for Instagram, then, is to monetize photos in a non-exploitive and anonymized way. If a picture really does say a thousand words, there is then a ton of inherent value in the millions of photos being uploaded every day. In that sense, Instagram and Facebook really are sitting on a gold mine.

Imagine if a user took a photo of a hamburger and Instagram could identify it as such. Combined with geo-location, the service could then beam ads or coupons from other nearby burger joints. Or it could say, “Hey, that’s a nice sunset picture you’ve got there – have you seen these airfare deals to Hawaii?”

Such a set-up would require additional investment from Facebook and Instagram into image recognition technology. They’re already into it, if the quasi-contextual Facebook ads – which controversially incorporate users’ photos – is any indication. But the leader in the field is clearly Google, which is rapidly expanding its ability to mine photos for data.

Facebook might want to look at acquiring other startups in this field, such as GazeMetrix, which helps brands identify their logos in online photos. The pictures may say a thousand words, but harnessing the data they convey could result in even more dollars. It would also be a much more elegant and user-friendly way to finally monetize Instagram than simply selling those images to the highest bidder.