Facebook Has Troubles With the Better Half

By Anonymous
Facebook Has Troubles With the Better Half

Facebook Chief Executive Mark Zuckerberg Photo: Mark Schiefelbein/Associated Press

Buying Instagram six years ago earned Mark Zuckerberg a considerable line of credit with investors. The problem now is that line is already looking maxed out at the time the Facebook FB -0.30% chief executive needs it the most.

Late Monday brought the surprise news that Instagram’s two co-founders are leaving the company. The pair have reportedly clashed with Mr. Zuckerberg and other Facebook executives in recent months over matters of growth and autonomy. Facebook bought the popular photo-sharing app in 2012 for $1 billion and has largely left it alone to operate independently within the company.

Instagram has since become the brightest spot in Facebook’s darkening world. The service has exploded in popularity, going from about 30 million monthly active users at the time to more than one billion now. That makes for an average growth rate of 79% a year against the 15% annual growth averaged by Facebook’s much larger core user base in that time. Instagram’s instant-stories feature also has helped Facebook survive the challenge of the popular video-sharing app Snapchat.

Even more importantly of late, Instagram has managed to avoid most of the controversies over user privacy, misinformation and election hacking that have dogged Facebook and resulted in an 8% decline in its market value this year. The controversies also have driven a string of other high-profile exits from the company. The co-founder of the WhatsApp messaging service that Facebook bought in 2014 for $22 billion announced his departure in May after reportedly clashing with top management.

That has made Instagram more vital to Facebook’s future. So it should be little surprise that Facebook’s leaders would take a keener interest in the service. And analysts still consider Instagram to be “under-monetized” relative to Facebook’s core business. Instagram—which had no revenue when Facebook bought it—is now on track to generate more than $8 billion in revenue this year, according to consensus estimates tabulated by Visible Alpha. That is about 15% of the total advertising revenue the company is expected to report this year, even though Instagram’s user base is about 45% the size of the Facebook core service.

Facebook’s challenge will be handling that business without turning off Instagram’s user base, which includes many of the younger crowd that have avoided the company’s core social network. That won’t be easy, and investors are a little skeptical. Facebook’s share price slipped nearly 1% midday Tuesday following the news, while Snapchat parent Snap Inc.’s shares rose more than 2%. It doesn’t help that Facebook’s hands-off approach to Instagram to date has created the image that its co-founders alone are responsible for its success. And in the age of Instagram, image is everything.