Instagram’s Growth Is Amazing: Here’s How It Can Make Money (AAPL)

Kevin Systrom and Mike Krieger

Dan Frommer

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Instagram, the photo-sharing service for iPhones, just announced some very impressive growth numbers: The 8-month-old product has 5 million users and almost gets 1 million photos posted per day.

But revenue is zero, or near it. The company gives its app away for free, doesn’t display advertising, and pays for hosting and storage costs, plus staff and rent. (Though with only four employees, founder Kevin Systrom is keeping “people” costs low for now.)

So, how could Instagram eventually make money? There are some obvious opportunities, but each has its benefits and drawbacks.

Charge for “pro” or “premium” features, either as one-time sales or subscriptions. Instagram could sell premium camera filters, special social status features, or access to detailed analytics.

The problem is that competitors could pop up that offer all of these for free, and steal users. Does Instagram have enough cachet or lock-in to get people to pay for stuff that is free elsewhere? Maybe, maybe not.

Display advertising or sponsored photos. With (eventually) tens or hundreds of millions of users, Instagram could potentially build a business off advertising, the way Twitter is trying to. Photos lend themselves to paid placements, “brands” may want to pay for followers, etc.

But it would be hard to argue that there is any purchase intent while browsing Instagram. (Except for hungry people looking at photos of food. Maybe a Groupon Now ad network tie-in?) And the ads may anger users or send them elsewhere.

Maybe the Instagram guys have some ideas for new types of advertising. But we get a feeling it’s not an immediate goal.

Charge developers to use its APIs. Instagram says that 2,500 apps are already using its APIs. That is probably good for building the ecosystem, but it also increases costs with no additional revenue. Charging developers, who have venture funding of their own, could bring in some cash.

But it would probably also discourage people from using the Instagram APIs, and potentially go to the competition.

Charge consumers to download the Instagram app or use the service. With network effects firmly in place, and a great reputation, Instagram could make $700,000 if it charged its next 1 million users $1 each to join. (After Apple’s 30% App Store fee.)

But this is a non-starter. Social networks thrive when there are no barriers to entry. Charging an admission fee could slow growth by half or more, and could soil the Instagram brand. (People are cheap!) This would almost certainly strengthen the free competition.

The reality is that Instagram, funded by venture capital dollars, doesn’t really need to make money now.

The startup model these days is to focus on growth first and revenue later. Instagram isn’t going to have any trouble raising more venture capital, so it doesn’t really have any reason to focus on making money right now.

When Instagram founder Systrom tells us that he has “lots of thoughts on how to make money,” as he did this afternoon, we believe him. But we also believe it’s not his priority right now.

Heck, there’s a good chance that Instagram will never have to figure out a way to make money. It’s the kind of fast-growing social network that many big Internet companies would love to own. Instagram’s founders could see huge paydays before the company ever makes a dime, and that would be a big victory for everyone involved.

So while this is a nice academic exercise, it’s probably not going to matter much in the short- to medium-term. Whether or not Instagram can and will become a big business isn’t really the point right now.

Earlier: Instagram: 5 Million Users, 95 Million Photos, 4 Employees