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Instagram Is Finally Opening Up Some of Its Best Advertising Real Estate

Adam Levy, The Motley Fool

Facebook (NASDAQ: FB) is starting to "explore" new options for ads on Instagram. The subsidiary announced on Wednesday that it's going to expand advertisements to the Explore tab in its app, the section where users go to discover new content from accounts they don't already follow. More than half of Instagram's billion users visit the section every month.

The decision follows Facebook CFO Dave Wehner telling analysts there's not much room to increase ad impressions in the core Instagram feed earlier this year. Meanwhile, the company is working to grow ad spend on Stories, which have become a massive source of audience engagement.

But while Stories require a significant adjustment, ads in Explore can work with similar formats and creatives as ads in the feed. On top of that, Explore can offer advertisers a lot more value by enabling businesses to reach potential customers when they're most receptive to their message.

The Instagram icon.

Image source: Instagram.

2 reasons Explore ads could be so valuable

Users go to the Explore tab when they're looking for something new. That behavior in and of itself ought to make businesses salivate at the possibility of advertising in that tab. Users will be most receptive to an advertiser's message when they're looking for something new.

Explore ads ought to have higher engagement rates than standard feed ads due to the nature of the section. But there's a second user behavior within the Explore tab that could be even more valuable.

When users go to the Explore tab, they can search for certain topics of interest. That can help advertisers target users based on keywords and provide extremely timely advertisements. 

It's this mechanism that makes Google's ads so effective. The Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary knows exactly what its users are looking for at that exact moment, and it can show them an ad related to that topic or product. Explore ads give Instagram advertisers that same opportunity. The addition of shoppable posts and the recent introduction of Checkout on Instagram could make Explore the perfect section for fashion and apparel advertisers.

Overall, Explore ads will be more engaging and more relevant to users. That should translate into higher average ad prices for those impressions.

The big risk

Instagram's Explore tab remains one of the few pristine sections of Facebook's domain untouched by advertisements. If ads become too intrusive, users may stop using the feature altogether. While it might not sound like a huge loss for Instagram -- declining engagement on a heretofore unmonetized section of the app -- remember that Explore helps users discover new content to follow. Users inevitably follow some of those discoveries, ultimately increasing engagement in the core feed.

If engagement with Explore declines, Instagram could see engagement in the core feed -- currently its main source of revenue -- decline as well. That's why the company is being cautious with the rollout of Explore ads. "We're introducing ads in Explore slowly and thoughtfully in the coming months," the company wrote in a blog post. 

Done right, Explore ads have the potential to become a major revenue source for Instagram alongside feed and Stories ads. Done wrong, it has the potential to decrease engagement throughout the app.

Counting on Instagram to grow Facebook revenue

Facebook is running out of levers to pull to grow its flagship app's advertising revenue. User growth is starting to slow down and engagement fell following changes to the news feed algorithm last year. Investments in Watch are showing some mild success but still represent a small opportunity compared to the massive amounts of engagement on Instagram. 

Instagram will account for the majority of Facebook's revenue growth this year, and it will only increase in importance going forward, according to Keybanc analyst Andy Hargreaves. He estimates Instagram will account for 70% of the company's incremental revenue by the fourth quarter next year.

Offering businesses advertising space in the Explore tab could be just the start. The company could tailor its ad products in the section to make them even more effective and fuel further revenue growth long term. As Instagram becomes a bigger piece of Facebook's business, investors need to pay close attention to the ad products in the app.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.