Facebook Isn't Solely Focusing on Ad Dollars Anymore

By Markets Fool.com

Image source: Facebook.

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During Facebook's (NASDAQ: FB) second-quarter earnings call, CFO Dave Wehner warned analysts that Facebook's advertising business will start experiencing slower growth as it saturates its ad load over the next year. While Facebook still has other avenues to grow the number of ads its users see -- Instagram, Messenger, Groups -- its latest product provides another avenue for revenue growth.

Workplace by Facebook (formerly called Facebook at Work) is, at its core, a software-as-a-service product. Instead of monetizing the product with ads, Facebook will collect a subscription fee from businesses for every user that signs up. As Facebook tackles enterprise software, it'll face familiar competition including Microsoft (NASDAQ: MSFT) and Google, a division of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Its biggest competitor, however, may be Slack, a start-up that recently raised funding at a valuation of $3.8 billion.

What is Workplace by Facebook?

Facebook developed an internal tool several years ago for its employees to share documents, updates, and work together more easily. That tool eventually became Facebook at Work, and it tested the service with over 1,000 companies while in beta for over 18 months. Now, it's ready to go public.

The main draw of Workplace is that it shares the familiar user interface of Facebook's flagship product. Users can create Groups for different teams and projects; they can chat with coworkers; and there's a news feed to see what's going on around the office or at the company.

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There are also some Workplace-specific features including analytics and better security. Most recently, Facebook added multicompany groups, so companies can securely share information with one another for collaborative projects.

The core functionality of Workplace is similar to Slack and Microsoft's Yammer, which are designed to facilitate intra-office communication and document sharing. It also includes elements of Google's G Suite, particularly hangouts for live video calling and document sharing.

Undercutting the competition

Facebook is severely undercutting its competition in terms of pricing. The monthly services pricing is as follows:

  • $3 per user for the first 1,000 users
  • $2 per user for the next 9,000 users
  • $1 per user above 10,000

By comparison, Slack's lowest paid tier costs $6.67 per month per user. Yammer and G Suite cost $8 per month and $5 per month, respectively, but each include much more functionality than Workplace. Yammer is part of Microsoft's popular Office 365 service, which includes its Office software suite and 1 TB or cloud storage per user. G Suite includes an email service, its document software, and 30 GB of storage per user.

Facebook is positioning Workplace as more of a complement to Microsoft or Google's software rather than a replacement. In fact, the company noted it's collaborating with those companies and others to integrate their services with Workplace.

The potential for Facebook

Workplace productivity tools may seem bland to most investors, but it's a large and growing industry. As mentioned, Facebook already has over 1,000 companies using Workplace that will now start paying for the pleasure. Citi analyst Mark May estimates the product could bring in $1 billion in incremental revenue for Facebook.

Additionally, Workplace is just one example of how Facebook can leverage its brand strength to compete in a highly competitive market. That could prove beneficial as it enters the virtual reality market among other non-advertising focused products.

While Facebook's advertising business is its bread and butter, investors should expect its rapid growth to slow: It's saturating the market for users, it's saturating the number of ads it can show in users' Newsfeeds, and it's facing increasingly difficult comparable quarterly results. Diversifying away from advertising with a subscription service for enterprises, which will provide steady and dependable cash flow, will provide a solid cushion for Facebook's quarterly results and revenue growth.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.