Instagram Loses Half Its Daily Users In A Month, And Here's Why [REPORT]

Instagram scared off a lot of users in December when it decided to update its original terms of service for 2013. Even though the company relented on its new terms after a week of solid backlash, Instagram users are still fleeing the photo-sharing app in droves.

According to data provided by app traffic company AppStats, Instagram, a unit of Facebook (NASDAQ:FB), has lost more than half of all its active users in the month since proposing to change its original Privacy Policy and Terms of Service. In mid-December, Instagram boasted about 16.3 million daily active users; as of Jan. 14, Instagram only has about 7.6 million daily users.

But all is not lost for Instagram. Data show that the popular photo-sharing app continues to gain monthly active users -- this could signal increased competition in the marketplace, or momentum taking its toll -- but unfortunately for Instagram, monthly users, by definition, post less often than daily users.

For those unfamiliar with Instagram's proposed amendment to its Terms of Service -- set to go into effect on Wednesday -- the company had originally granted itself licensing rights to sell to third parties any photographs posted on the app, particularly to its parent company Facebook.

Here was one particular passage that ruffled many feathers:

"Instagram does not claim ownership of any content that you post on or through the service. Instead, you hereby grant to Instagram a non-exclusive, fully paid and royalty-free, transferable, sub-licensable, worldwide license to use the content that you post on or through the service."

Users could have set restrictions on which of their photos are seen on the service, but that's only within Instagram. No matter which restrictions were applied there was no guarantee that an individual's photos would not be used elsewhere -- for example, in a Facebook ad.

"Our updated privacy policy helps Instagram function more easily as part of Facebook by being able to share info between the two groups," Instagram wrote in a blog post about the changes. "This means we can do things like fight spam more effectively, detect system and reliability problems more quickly, and build better features for everyone by understanding how Instagram is used."

That was the public reason offered by Instagram; buried within its new Terms of Service, however, there was another reason:

"Some or all of the srvice may be supported by advertising revenue," Instagram writes. "To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you."

Put simply, Instagram's old ToS said the company could place advertisements within the site and alongside people's photographs; the new ToS said it could use these photos as advertisements, without a single cent owed to the person who originated the picture.

Instagram quickly tried to plug the leak when users complained about the new approach by reverting to its original privacy policy. But much of the damage was done; the incident clearly left a bad taste in users' mouths.

Instagram may be taking a bigger hit in the UK, where fears of the loss of digital privacy have been heightened recently by the proposed Business Enterprise Regulatory Reform Bill, which seeks to update Britain's copyright laws in a way that opponents say would essentially allow online images to be used freely for commercial purposes.

Instagram will probably stay out of this overseas issue for now -- plenty of regulators in the UK, U.S. and the European Union will have something to say about BERR before it can become a law -- but Instagram and apps like it are in a somewhat precarious position as countries consider how to deal with digital copyright issues.

Assuming the data from AppStats are accurate, Instagram may want to pursue another campaign to bring users back to the service. Losing more than 7 million users isn't just a minor hiccup; this has the makings of a PR and earnings disaster, and could be the company's biggest test ever. Instagram has Facebook to prop it up, but it's going to need more than mere support to win back the hearts and trust of its user base.

Moving forward, Instagram will need to find a better way to make users feel welcomed and secure on its platform. Most Instagram users signed up to express themselves, not sell themselves -- and certainly not to have someone else profit from their lives.