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Why Instagram thinks its users love their ads

Rick Newman
Senior Columnist

Will Facebook wreck Instagram?

That’s the concern some users have now that Facebook, which bought Instagram in 2012, has started running ads on the image-sharing site. Instagram had been ad-free since it started in 2010.

For now, the presence of ads on Instagram appears to be lighter than on Facebook, as the company gauges the reaction of users. “They’ve been very careful to roll out ads in a measured way,” says analyst Brian Blau of the Gartner Group. “Facebook is a very fast innovator, but not necessarily with ads.”

With annual net earnings of about $3 billion and a profit margin of 18%, Facebook—the Yahoo Finance Company of the Year in 2015—can afford to be patient. When CEO Mark Zuckerberg bought Instagram for $1 billion in 2012, many tech analysts were sure he overpaid. They were wrong. Less than four years later, Instagram is worth more than $20 billion, estimates Piper Jaffray analyst Gene Munster. Within a couple of years, Facebook expects Instagram to contribute $2 billion or so to topline revenue.

The trick, of course, is rolling out ads to Instagram's 400 million users, without alienating them and sending them to the competition, like Pinterest and Snapchat. “We’ve always put the Instagram community first,” Marnie Levine, chief operating officer of Instagram, told us when we traveled to Facebook’s headquarters in Menlo Park, Calif. in early December. “As we’ve introduced advertising, we’ve tried to listen to feedback of the community.”

[What do you think of the ads on Instagram? Sound off on the Yahoo Finance Facebook page.]

Levine won’t spell out exactly how Facebook evaluates user concerns, but she says targeting ads to users' interests is one way to provide something that’s useful to them, instead of annoying. And Facebook may know more about its users’ interests than any other digital service, thanks to all those likes and dislikes we register, plus all the other info that emerges as we follow and friend. For people who have both a Facebook and an Instagram account, there’s even more data available on what kinds of ads we might actually want (or dislike the least).

Instagram ads also have an "X" users can click, to kill the ad. Levine says. Do a lot of users do that? “What we’re seeing is just the opposite,” Levine says. “There are some kinds of ads I hadn’t expected would produce so much meaning to people on Instagram.” One example she cites is a Capital One ad with the theme of “what’s in your wallet.” For several weeks, the bank turned over its Instagram account to three ordinary users, who posted images of things found in their wallets. Facebook says the campaign resonated with Instagrammers, while Capital One says it was successful, too.

[Check out our behind-the-scenes glimpse of life at Facebook.]

To some extent, experiments with advertising on Facebook, Instagram and other social networking sites will dictate the direction of advertising overall. The splashy image ads honed to perfection during the "Mad Men" era are fading, increasingly replaced by spots that inform, entertain and even let consumers provide some of the content. Advertisers want to know precisely what their ads accomplish and are no longer satisfied with vague assurances that ads merely enhance brand awareness.

Social ads, as those run on Facebook and Instagram are known, allow advertisers to measure effectiveness in real time, while also requiring them to offer something relevant. “They’re targeted to people based on their likes and interests, so hopefully they’re getting the right story at the right time,” Levine says. If she’s right, Instagram users should have no problems with ads at all.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman .