Facebook has pulled of a large Silicon Valley coup by poaching PayPal President David Marcus from eBay. Marcus will move to Facebook to become head of messaging products – just Messenger, not WhatsApp, Instagram or the nascent Slingshot. The move has signaled to many that Facebook will start aggressively pursuing a money making strategy for its messaging products – in the first instance Messenger.
The interesting element here isn’t Facebook searching for new revenue streams but its mobile strategy with its two messaging apps – Messenger and WhatsApp.
In this first post I’ll take a look at why Facebook is searching for revenue outside of advertising. In the second part I’ll provide some thoughts why Facebook’s product strategy will see Messenger and WhatsApp take different paths resulting in Messenger ultimately transformed into a broad platform.
Facebook state of play
Facebook’s business is titled. It makes the vast majority of its money through advertising on its main Facebook.com/app platform. The company has a revenue stream through virtual goods and taking a slice of developers in-app purchasing (mainly social games) – although this is relatively small and stagnant stream. It will also start to earn decent sums on Instagram’s fledgling advertising business and WhatsApp’s $1 annual fee.
Facebook revenue – heavily weighted towards advertising
So the company is searching for ways to develop diversified revenue opportunities for its growing set of products. This is where Messenger fits in.
Messenger state of play
Marcus will take the lead on a product which is arguably mature. It has a large, growing and relatively global user-base (if slightly US centric) – more than 200 million people regularly use Messenger (Facebook Q414 earnings call).
Interestingly, on the last earnings call Facebook CEO Mark Zuckerberg was quite clear that Messenger’s priority was still growth and not monetization: “For the next set of apps like Messenger, Instagram and hopefully soon WhatsApp, the current priority is growth. Messenger and Instagram both reached 200 million monthly actives this quarter. We believe these apps have a lot of room to grow and will start to be important businesses in the future, but monetization isn’t our near-term priority here.”
Facebook clearly views Messenger as a fledgling, growth product and won’t risk stunting this growth with aggressive moves to monetize the app that impact the user experience. Facebook has just ripped Messenger out of its main mobile applications to create a standalone mobile experience. With Messenger unshackled from the main Facebook app it can look to develop as a standalone product. So there may not be large product changes to drive monetization in the near-term. But what about the mid-to-long-term?
Money with Messenger
There is obviously a huge opportunity with Messenger – a large user base and a standalone experience to build on top of. And Marcus’ appointment points to a product direction focused on payments and commerce.
An obvious revenue opportunity is a money transfer service. Facebook has/is getting some of the foundations in place for this already. It’s seeking approval for a Europe-wide license for an e-money service (Financial Times). While in the US is has already got a Money Service Business licenses in 48 states. This effectively means Facebook users can store and transfer money through the social network.
A peer-to-peer money service makes sense. Imagine a groups of friends out at dinner and someone doesn’t have cash – they could simply transfer what they owe to a Facebook friend who then can move it into a linked account. This provides a seamless way people can shift small amounts of money between friends without having to install a new app and get their friends to do so as well. Facebook’s network effect lends itself well in this peer-to-peer scenario.
This type of service has been successfully rolled out by other companies. The most successful is Barclays bank and its Pingit app. This enables UK current account holders to shift money through phone numbers. Pingit has been downloaded by 2.8m people, who have made £475m worth of transfers on the platform since its launch in 2012.
It’s a nice opportunity and is a natural route for Marcus to take with his PayPal experience. But functionality is one thing, trust is another. It’s far easier for a brand like Barclays to gain a consumer’s trust when it comes to money than it is for Facebook.
It’s a big leap from a Facebook / Messenger user who is more attuned to using the products for social networking and communication. For the product to develop into any form of a payment and commerce platform it needs to build trust.
Facebook gains trust by focusing on its heritage in virtual goods and following a path carved out by its Asian messaging app rivals.
Asian influence
Facebook has taken a cue from rival messaging apps emanating from Asia. It recognizes virtual goods are the first move to develop and monetize Messenger.
Step one trust. Facebook has a heritage in offering virtual goods with app subscriptions and in-app purchases. It has got people comfortable with the idea of paying for virtual goods through Facebook. It’s an easy step for people to now pay for virtual goods in Messenger.
Step 2 product. Simply put, stickers.
Facebook stickers currently available
Facebook is already offering a variety of stickers in Messenger but all of them are free. Stickers are a big opportunity. Take Asia, where stickers have absolutely blown up. Mainly through the difficultly of writing in Asian characters and it being easier, and more fun, to communicate through graphics rather than characters (incidentally this is why voice text messaging has taken off in Asia – you regularly see people speaking into their phones like walkie-talkies). While seemingly frivolous, stickers are big business. Line sold $70 million of digital stickers in 2013 – or 20% of its revenue.
People now feel comfortable downloading free stickers in Messenger. The next step is to make them buy stickers in Messenger which in-turn makes them feel comfortable with Messenger / Facebook handling their money.
This is a path which begins to take Messenger far beyond a communication app and into its future as a platform. More on this in part two.
Matthew Simms 