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CNBC Exclusive: CNBC Transcript: Instagram CEO & Co-Founder Kevin Systrom Sits Down with CNBC's Julia Boorstin

WHEN: Today, Wednesday, December 10th

WHERE: CNBC's "Squawk Alley"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Instagram CEO Kevin Systrom and CNBC's Julia Boorstin. Video from the interview is available on CNBC.com.

All references must be sourced to CNBC.

JULIA BOORSTIN: Okay, so you're announcing 300 million monthly active users. Congratulations. You've added 100 million since March. What drove that growth?

KEVIN SYSTROM: What really drove that growth is the community. So Instagram doesn't exist in a vacuum. We're not a bunch of siloed individuals. It's a bunch of people coming together on topics, fashion, you know, youthful teens, creatives, photographers, foodies, everyone coming together and building a community around the things they love, communicating visually. So whether you're taking a photo of your vacation or, you know, a plate of food, you're partaking in a larger community.

JULIA BOORSTIN: Do you have a sense of who those new users are? I mean, are these teenagers? How much of it is international? Tell us a little bit about where exactly that growth came from?

KEVIN SYSTROM: Well, a big part of our community is international. About 70 percent of our community is outside of the United States. And that's pretty astonishing for a company that's about four years old. So most of the growth is international. But yes, we're seeing a lot of people coming in in the fashion world, a lot of people coming in in the youthful teens world and a lot of people internationally as well.

JULIA BOORSTIN: Can you keep up that pace of growth?

KEVIN SYSTROM: Well, that's the big question. And that's the big challenge for me and my team going forward. But what we're focused on is building great products like Hyperlapse that just got runner up for Apple's app of the year and other things that basically drive growth in our community going forward.

JULIA BOORSTIN: And so you say that's the big question. But what's your answer? How – what is your plan to maintain that growth rate?

KEVIN SYSTROM: Well, the plan is obviously to maintain the growth. And at every step of the way we've been amazed that more people come in and use the product mostly because four years ago, we never assumed we'd get to 300 million. But obviously there are services like Facebook that are well past a billion users. So with more and more people coming online and using smart phones everywhere, all over the world, I believe we'll get there.

JULIA BOORSTIN: You now have more users than Twitter. Twitter's market cap is something like $23 billion right now. How many billions of dollars did you leave on the table?

KEVIN SYSTROM: Did we leave on the table personally?

JULIA BOORSTIN: By selling to Facebook.

KEVIN SYSTROM: Oh, I see. I don't like to think of it that way because entrepreneurs worry about impact in the world. Entrepreneurs don't think necessarily about billions of dollars. And I think it's hard to compare Twitter and Instagram. Twitter has a more mature business. They're public. We've just started monetizing. We have a lot to prove before we're, you know, worth many billions of dollars.

JULIA BOORSTIN: Well, to go back to that comparison to Twitter, you said you just started monetizing. You know, Twitter last quarter had a little bit more than $360 million in revenue. How long will it take for you to get to that scale in terms of revenue? And how big is the potential market for Instagram ads?

KEVIN SYSTROM: Well, the way we look at the market is that we're not competing against other tech companies for ad dollars. We're competing against print and TV. We are selling brand advertising that shifts perceptions, for instance, like Chobani. Chobani did a really wonderful yogurt campaign on Instagram to shift perceptions away from the fact that they were just yogurt. And they had a seven point incremental lift on shifting that perception through a brand advertisement on Instagram. That's the type of thing you typically see in a magazine or on TV. If you look at those markets, they are very, very large. And I think that's what we're going after. So you can see where we're headed.

JULIA BOORSTIN: But you don't think you're competing with Facebook for ad dollars? It seems like increasingly as Facebook does more video ads, like, you would be going head to head with Facebook.

KEVIN SYSTROM: Well, we're inside of Facebook. And remember that most of our team works at Facebook. So I think it would be crazy to say that we're competing against Facebook given that we are one in the same.

JULIA BOORSTIN: But in terms of when you pitch to advertisers, the digital ad market is still relatively nascent. And so as these brands decide where to allocate, are they going to advertise both with Instagram and Facebook?

KEVIN SYSTROM: Well, let's also remember that Facebook today makes a large proportion of its money on direct response advertising. And Instagram up to this point has been significantly brand advertising. So they're two very different markets right now. But I think you'll see intersections in the future that are very interesting.

JULIA BOORSTIN: You've been very cautious about the way you've been rolling out ads both photo ads and video ads. How's it going so far? And when are you going to start really ramping that up?

KEVIN SYSTROM: Yeah, well, we have ramped it up. And the way we're ramping it up is making sure that our advertising really meshes with the community. So one of the things that I personally did was make sure that I saw every advertisement before it went on to the platform. Why did I do that? It's about setting a bar. It's about making sure that every advertiser that comes onto Instagram knows that we take quality and creativity seriously. And if you look at, like, the example I gave before in Chobani, you see the quality that comes through given that we're looking at each and every advertisement. So that really – it started to scale. And we're, you know, very optimistic. But it's early.

JULIA BOORSTIN: How long can you continue to examine each and every ad if you're scaling?

KEVIN SYSTROM: Yeah, well, we've come up with a fairly complex yet a fairly efficient system for reviewing that stuff. So it's less about doing that into the future. And it's more about setting a tone and a style early on to make sure that every advertiser looks at early examples and says, "That's what I want to shoot for."

JULIA BOORSTIN: So if you say you're starting to scale, when will we start to see Instagram's numbers show up in Facebook's quarterly earnings?

KEVIN SYSTROM: Yeah, unfortunately I can't comment on that. But what I can say is that we're working very hard on turning Instagram into a serious business.

JULIA BOORSTIN: Oh, okay, is there any data you can give us on the video ads in particular?

KEVIN SYSTROM: We don't have data to share on the video ads. But what I'll tell you is that it's interesting to note that Instagram didn't have video before. And only a couple years ago did we really take video seriously as an effort and then finally launched Instagram video. And it's becoming you know, essential part of the way that public figures and brands are communicating. So whether you're Michael Kors or Burberry or Taylor Swift, it's the way you're communicating with all of your fans.

JULIA BOORSTIN: Now and sort of in terms of the big picture move towards this ad model, how are you managing sort of user – potential user backlash or concern that the ads are overwhelming the stream? I mean, how do you – I mean, obviously you're examining each ad. But how do you deal with the balance of ads versus content?

KEVIN SYSTROM: One of our values internally is community first. We always make sure to go to the community first and communicate to them what our intention is. We learned very early on at Instagram that our core asset was that community. And we can't do anything to alienate them. So what we make sure to do is obviously we review the ads before they go on. But we also make sure that people don't see too many ads too quickly, that they see only a certain number per day and that we ramp that up over time and that we take feedback seriously. So we actually ask users for feedback about the ads that they see. And we make sure to keep quality really high.

JULIA BOORSTIN: You face major user backlash when you change the terms of service to give Instagram the rights to use photos in ads or sell users' photos. You went back. You changed that entirely. How is that experience and your concern about users holding you back, restraining your ad model in general?

KEVIN SYSTROM: What happened was when we joined Facebook about two years ago we decided to revamp the terms of service that were very, very, let's say, early in our history. We hadn't really taken a look at them. We really wanted to make sure that they were seriously considered. So as part of that we changed it. And you know, everyone thinks we said that we would sell people's photos or that we own their photos, we don't. You own your photos. So every person that posts on Instagram owns their photos. But we wanted to revamp that terms of service. And we took the user feedback around that time to make sure that it was much more clear about who owned their photos. That hasn't affected our ramp in the business at all because I believe we've set the tone very clearly to our user base and our community that they own their photos.

JULIA BOORSTIN: What's your biggest opportunity outside of advertising? What about adding a buy now button?

KEVIN SYSTROM: So outside of advertising I actually think it's more in the discovery element. So there are hundreds of millions of people using the service every month now. But it's quite hard for people to find each other. So if I can find the brands and, you know, the public figures that I'm actually interested in, if I'm interested in electronic music, I should be able to find the deejays I want to follow. If I'm interested in, you know, high men's fashion, then I should be able to find those brands. But it's actually quite difficult right now. So what we're working on is making sure that we can make the connections between users and the accounts that they want to follow.

JULIA BOORSTIN: And what would the business model be there? It would be, like, promoted profiles like in Twitter?

KEVIN SYSTROM: Well, it's less of a business model and it's more of a product feature. So I believe that, you know, a good portion of what we need to focus on in the next year obviously is monetization. But aside from that we need to make sure to provide utility and value to both brands and users alike. And making those connections is the value that I'm talking about.

JULIA BOORSTIN: But do you see monetization outside of advertising? Would you do a commerce feature?

KEVIN SYSTROM: There's possibility that we could do something outside of just advertising. We've considered it over time. One of the earliest requested features was to do premium filters where a brand could sponsor a filter. It's just not in our wheelhouse. It doesn't feel Instagrammy in the way that the high quality brand ads do. When you open up a Vogue Magazine and you flip through and you see beautiful advertising and beautiful content, that's the type of feeling we want to evoke. So we've stayed away from some of the other stuff up until now. But I won't count it out.

JULIA BOORSTIN: It does seem like commerce would be a natural extension.

KEVIN SYSTROM: Yeah, there are a lot of retail brands who currently use our advertising. So for instance, like, Michael Kors or Burberry are great examples of companies that have found tremendous value in communicating their retail offering to consumers. And I believe we can make that an improved experience over time. How? I'm not sure yet.

JULIA BOORSTIN: You were making some moves to purge spam and spamming accounts. How important is that for your product in general but also from an advertising perspective?

KEVIN SYSTROM: Well, authenticity is really key. When you open up Instagram you need to know that you're seeing the real Tony Hawk, the real Taylor Swift, the real Burberry. And it's really important for businesses as well. There are a lot of knock off accounts on the internet not just on Instagram but around the world on other services that are trying to take attention away from brands. So with this move of verified badges, we wanted to make sure that we could both verify accounts like, for instance, Burberry I mentioned before so that you know you're following the real, authentic Burberry. It's very important for us to do this especially as we introduce advertising to make sure that you see the real one.

JULIA BOORSTIN: Yes, it seems especially with that ad model. Now what about private messaging? How is private messaging doing? And is it competing with Snapchat?

KEVIN SYSTROM: Instagram Direct is a really interesting feature because it's grown significantly since we launched it. People continue to use it to communicate more privately. If you think about Instagram as very public and every single post you post goes to each and every one of your followers, we wanted to give you a space to communicate more privately. And it's grown really well. We don't have updated numbers right now. But I think the last ones that we did update were very impressive from where it had started.

JULIA BOORSTIN: Can you give us a sense of sort of who your competition is there? Do you see Snapchat as the main competition for Instagram Direct? Or how are you facing off with them?

KEVIN SYSTROM: One of the revelations we've had about competition is just like when you think about advertising and how we're not competing against other tech companies, we're competing against the large, existing incumbents like print and TV. If you think about engagement, our currency is time spent. How much time do people spend on Instagram? And if you think about that as the currency, any service that takes you away from Instagram for an incremental minute is obviously a competitor. So we think in the Facebook family of apps whether that's Instagram, Facebook or WhatsApp, we think a lot about time spent and anything that can compete for that. So in many ways every other tech company is a competitor. But we really focus on ourselves because in many ways we're our own biggest competitor.

JULIA BOORSTIN: But certainly the introduction of these direct messages and the disappearing messages was sort of served as an alternative to Snapchat. Are you working on anything else to help beef up those tools?

KEVIN SYSTROM: Instagram Direct will continue to be improved over time. And in fact we're working on stuff right now that will improve Instagram Direct. But given how quickly it's grown I think what we need to do is see how it's taking off in the community, listen to people, how they're using it and then figure out a path from there.

JULIA BOORSTIN: What's the next extension of your business? You launch video, Instagram Direct. What else will there be? And will we see a family of Instagram apps the way we have a family of Facebook apps?

KEVIN SYSTROM: Well, like many tech companies, we don't like taking about our future too much. But what I can say is that we're focused on discovery in the future. It's all about discovering new accounts, new content, et cetera. You saw our most recent release we actually changed our explore tab to be a search tab. That's a movement over the next year that you're going to see continued. We introduced a people tab so that you could see new accounts you might like to follow. We revamped the explore page with all those photos of interesting photos you might like. We revamped the algorithm as well to make it even more engaging. That's the kind of stuff that we're working on right now.

JULIA BOORSTIN: Now it's interesting that you're talking about sort of tweaking the user experience. But this is also the first time we've really talked publicly about the growth of your ad business. Can you give us sort of an overall sense of how your relationship with Madison Avenue has changed? What are the conversations like now compared to what they were a year ago?

KEVIN SYSTROM: Well, a year ago they were nonexistent. So now they exist. And the good part is that Madison Avenue looks at Instagram as an opportunity to learn about a new format. And we use it as an opportunity to solve a business need. One of our values internally is always solve problems. It's not enough to just build something and hope it works. You have to go talk to your customers. So we sit with advertisers. We listen to the types of problems they're having in online and digital advertising. And we make sure to solve their problems. So what we've heard is that they want to shift perceptions. What they've heard is they want high quality. What they've heard is they want access to different demographics. Those types of things really drive our business decisions and how we form advertising going forward. That's how the conversation is formed.

JULIA BOORSTIN: Do you give them any stats on you know, as you mentioned with that one Chobani example, do you have any overall stats that you give them or could give us?

KEVIN SYSTROM: Well, we give them stats all the time in the form of insight. So we built a product that we've given to select advertisers so that they can see who's seeing their advertising, the demographics. They're really understanding their advertising as well, figuring out what their actual opportunity is. Those are the types of things we do. But other than that we don't release specific metrics.

JULIA BOORSTIN: You say you don't think about the billions you left on the table by selling to Facebook when you did. What are the advantages and disadvantages of being owned by Facebook?

KEVIN SYSTROM: Well, you have to understand that one of the reasons why we're having this conversation today is because we're at Facebook. So I think it's kind of hard to ask the question of, like, what would a world be like without Facebook? Most of our team is from Facebook. Most of our growth was driven by Facebook. I believe we are where we are because of all the technologies that we've employed because we're at Facebook. So I'm very thankful to be there. And I think a lot of our team is as well.

JULIA BOORSTIN: There's been a lot of concern recently about hacking with the Sony hack, of course, just a couple of miles from here. How focused are you on privacy concerns?

KEVIN SYSTROM: We have an entire team focused on privacy and policy. I'm personally very concerned going forward that we take each and every person's privacy very seriously. And I know we are currently. And I know that it's becoming even more of an issue as more and more people come online, as we understand more and more how our data is being stored and used. So my commitment to our community is that I take it very seriously.

JULIA BOORSTIN: A final question about Walmart. You were recently added to the Walmart board. What has your experience spending time with the folks at Walmart taught you in terms of what you're bringing back to Instagram? Does it make you think about retail differently?

KEVIN SYSTROM: So the interesting part about being at Instagram is that we have 180 employees. To be part of a company and on their board of 2.2 million employees around the world, that teaches any CEO something. So as much as I feel like, you know, we – I can help Walmart understand how we've grown our business and, you know, how we see the next generation of consumers, I'm learning a tremendous amount about retail, about advertising, about scaling a very large business. And Walmart is a great example of a company that's done that very well.

JULIA BOORSTIN: And when you look to next year, what are the trends your most focused on? I mean, we've seen a rise of interest in privacy. You have direct messaging. What's the next big thing?

KEVIN SYSTROM: Well, the next big thing for us and I've said this a few times is around explore and discovery. There's so much data out there that sits on Instagram to the tune of 70 million photos being upload every single day around the world. 70 percent of our users are outside of the United States. And 100 million people on Instagram were added in the last month or sorry, the last nine months. If you think about that scale of business, you realize that there are photos pouring in from everywhere in the world. If you're interested in really eclectic topics, I guarantee you there are accounts that are related to that. So we need to make sure to connect you with the content that matters most to you.

JULIA BOORSTIN: Will you be able to add another 100 million users in the next nine months?

KEVIN SYSTROM: We're certainly going to try. But there are no commitments right now.

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