Image source: Facebook.
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Both Messenger and WhatsApp have over 1 billion users, but they don't generate any revenue for Facebook (NASDAQ: FB). On Facebook's third-quarter earnings call, CEO Mark Zuckerberg laid out the road map for how Facebook monetizes its products. More importantly, he told analysts where each product is on that map.
Facebook stock came under pressure after CFO Dave Wehner told analysts he expects ad revenue growth to slow while expenses climb next year. With the company running out of space to squeeze in ads on its flagship platform, investors are hoping the huge user bases of Messenger and WhatsApp produce some meaningful revenue in the near future.
The three phases of product monetization
Zuckerberg broke down the path to monetization.
I think about our progress here in three phases. The first phase is building a great consumer experience and getting it to scale. The second phase is about enabling people to organically interact with businesses. And then the third is to give businesses tools to reach more people.
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Zuckerberg has said similar things in the past, but this is by far the clearest view into the company's thought process. Specifically, phase three provides a better understanding of how to move from organic interactions with businesses to monetization.
With the understanding that Facebook needs to develop new tools for businesses, it makes sense that Facebook plans for 2017 to be a year of aggressive investments. Wehner told analysts during the third-quarter earnings call that "2017 will be an aggressive investment year." The company will primarily spend more on engineering talent.
Where are Messenger and WhatsApp?
Zuckerberg says Messenger is in the early parts of the second phase. The company introduced bots for Messenger in April, and it now has 33,000 of them live on the chat app. Bots automate a task and Messenger bots can do things like hold an initial conversation with a business's customer and answer questions.
He later noted, "I think we're going to need many more than 33,000 and the number of people using them I think
is still pretty early in terms of there are more than a billion people using Messenger.
So we need to get that rolled out pretty widely." Indeed, the scale of businesses on Facebook is significantly larger than 33,000, sitting around 60 million. Even Instagram has 1.5 million businesses using its new business profiles. So Messenger needs a lot more businesses using its free products before Facebook tries to sell them tools to reach more users.
In the near term, Zuckerberg pointed out, Facebook allows businesses to advertise in News Feeds to open a chat in Messenger. Then in Messenger, businesses can follow up and complete transactions. While it's not direct monetization, it's further establishing Messenger as a place to interact with businesses.
On WhatsApp, Zuckerberg says Facebook will push it into phase two over the next year. Long term, the plan is to make Messenger and WhatsApp places where customers and businesses can carry out transactions or businesses can offer more tailored customer experiences. Whether WhatsApp will follow the path of Messenger with payments and chatbots is unclear, but considering the similarities between the products, that would make the most sense.
Still a long time
All things considered, Messenger and WhatsApp are still in the very early stages of monetization. Investors expecting them to generate significant revenue in the next couple of years will be disappointed. With Facebook's core advertising business facing pressure from slowing ad load growth, investors are looking for the next big growth driver. Instagram is growing strongly, but it still makes up a tiny percentage of Facebook's business.
But it could still be years before either makes a significant amount of revenue. "We think it'll be a long time before we have a business model for those," Facebook CTO Mike Schroepfer told reporters last week.
Zuckerberg has clarified the path to revenue growth for Facebook. It's spending to attract the necessary talent for the path. Now, it just needs to execute. Investors need to remain patient.
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