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It was expected, especially after those articles showing how Instagram has been used as a selling platform on Middle East[0].

[0] Just one of them: http://www.digitalks.me/social-media-marketing/instagram/how...

This is a really good looking ad. Do you know what the problem with ads like this is? They don't work. Ads that don't stand out, that blend into a seamless UX that allows a person to navigate a content company's media platform quickly in a goal-orineted manner; they don't fucking work. They get ignored.

So the marketing company or the sales dept turns up the juice a little bit. They allow them to stand out a little more. They give them special bells and whistles the user created content doesn't have. They let them animate, float over content or auto play video or sound.

Why? Because it makes the product a little better for the customers: the advertisers. Instagram, just like their Facebook overlords, are now in the business of making their product as good as it can be for the advertisers while keeping the users just happy enough not to leave.

I really dislike this cycle in the startup world. I don't know a good way around it. I'd like to see someone disrupt that.

I'd like to see someone disrupt that.

Ads are the only form of micropayment that is currently widely-available. If you solve the micropayment problem, you have a chance of shifting control from advertisers to consumers. I'd pay $0.001 to read your blog post.

Of course, many companies like to double-dip, like the NYT with their subscription charges and ads, so I think ads are going to be around for a long time.

Should also highlight that these companies have a long history of double dipping. Like getting commercials on your $59.99 comcast subscription.
I signed up for cable without previously experiencing it, and I honestly expected no commercials, since I was 'paying for it'. I was not a customer for very long.
"This is a really good looking ad. Do you know what the problem with ads like this is? They don't work."

Actually, they do. They become part of the brand story. Whether you realize it or not, Instagram has evolved the SAME WAY as TV commercials in the Post-WWII world.

What started as TV shows sponsored by brands (the Coca-Cola Hour!) became magazine style ads interspersed between the show's content (TV commercials as we know them today).

Instagram started with entire channels sponsored by the brands (@NikeRunning) and now are moving to the magazine/tv commercial model of putting branded content between in-stream photographs.

This is not new. This does work. Stop fighting change just because you think "startups" are above it. They're not. Originality is the art of concealing your sources. Embrace that and just make it work as best as possible given your product + audience and get on with it.

The ads that get results won't be a subtle as this, and without that subtly you'll start to hurt positive metrics - it's the game where users expect 100% value towards them, and you must play it to win otherwise they are mobile and will simply use a new service.
I would gladly pay some yearly fee to be able to use Instagram (and most of the services I use often, really) ad-free. I really wish this was an option.

I assume either a) it's prohibitively expensive to implement such an ability based on how much revenue they expect vs. lost ad revenue vs. lower user engagement due to ads lessening the user experience, b) people are less willing to pay to put ads on your service at a given price if there is a segment of your user base that is guaranteed not to see them.

I'd expect, also, that the users that are engaged enough and affluent enough to be willing to pay for such a service are also especially valuable as targets for advertising, to add to point b) above. I'd expect CPMs to be pretty profoundly affected by allowing that kind of option.
Agreed. I can't exactly put my finger on it, but having ads on instagram makes it feel somehow 'cheaper'
There's also a huge cost in supporting subscribers. I worked at 2 startups that supported subscriptions, and at least 50% of support was just around that. No subscribers at this point means keeping support costs the same instead of doubling them.
Or provide a paid app ($20-30 even) that handled multiple accounts better. Anyone working in social media would quickly buy this rather than log out and in all the time.
It'd be interesting to see them monetize on user content. With all the pictures of cups of java, bowls of salads, plates of sushi and other food items that are geotagged, Instagram could start including ads for promotions at these restaurants or similar highly rated restaurants near me. I'd find that sort of advertising useful and enjoyable.
I just invented something (probably not). Voluntary Ad Photo Submissions™. Someone takes a photo of their friend drinking Pepsi. Posts it, tags the advertiser: @pepsi. Use a hashtag, whatever. Pepsi looks through their submissions, selects a photo they like and uses it for their Instagram ad campaign. BAM. Now it's a game. The "winner" is popular, they get the likes. Pepsi gets tons of free advertising from everyone posting Pepsi photos.
perhaps even pay out a small percentage to the user based on the number of likes?
I don't think they'd need to. Plus doing that and avoiding it being gamed would be a hassle.
Facebook have something somewhat similar to that called Sponsored Stories. Page admins can pick a user post and promote it/turn it into an ad. Doesn't have the cool acronym VAPS though :)
So the bait-and-switch begins.

There are a number of startups including Nitrogram, Olapic and Pixlee who seem to be doing well selling analytics, user-generated content, customer service tools and branded contests based on Instagram. Those business models seem like a much better fit for the platform.

Sad to see Instagram take the lazy route.

Interesting how both Instagram and Pinterest are starting this transition at pretty much the same time with a very similar approach (http://blog.pinterest.com/post/61688351103/planning-for-the-...). Tumblr is already down the exact same path of inserting native-looking content with a small "sponsored" label.

I'm sure big, sexy brands will have no problem creating some nice-looking visuals that will fit right in. Questions is for me whether this will ever work for the long tail of advertising that is currently tweaking their keywords on AdWords. Anybody have any insight or experience with this?

Is it just me or does it seem like everytime Twitter announces something about the IPO instagram writes a blog post about ads?
I don't understand why they don't just charge accounts with more than X followers. High profile brands are (currently) getting a massive amount of free advertising. I'm sure they would be willing to pay to keep up their profile.

See Mailchimp, free up to 2k subscribers, paid after that. It's so simple.