What Will Monetization Look Like For WhatsApp and Facebook Messenger?

With ad-load reaching saturation on the company's Instagram and namesake Facebook platforms, the next big lever Facebook CEO Mark Zuckerberg can pull is with messaging apps WhatsApp and Messenger.

In this segment fromIndustry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA,discuss how Facebook (NASDAQ: FB)might connect users to businesses on the messaging apps.

A full transcript follows the video.

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This video was recorded on May 5, 2017.

Dylan Lewis: I think one of the biggest things that's been on my mind as a Facebook shareholder is: What exactly is the plan with the Messenger properties? You touched on some of the more ephemeral features that they've added to WhatsApp and the adoption there. But you look at the gross numbers of monthly active users, WhatsApp has over a billion monthly actives. Messenger has 1.2 billion monthly actives. Those are massive and relatively untapped opportunities for Facebook to monetize. In the past, Mark Zuckerberg has outlined this philosophy of phase 1, get a really great consumer experience and get it at scale. Those are clearly both there already. Phase 2 is have people interacting with businesses freely, and I think that's where both these platforms are. Phase 3 is, help the businesses reach people. That's where you start to see monetization, that's where you see ads or sponsored content, something like that. With Messenger properties both in phase 2, I'm wondering what that's going to look like. I don't mind as much that Instagram isn't broken out as a product segment, because the monetization strategy there is very similar to what they're doing on the main Facebook platform. A lot of the learnings there are going to port directly to it, because it's a visual medium, it' not a messaging app, it's a very news feed-oriented platform. But, when you look at WhatsApp and Messenger, the experience for users is a little bit different.

Evan Niu: Yeah. I think the challenge on the messaging side, in terms of building a business, which, Zuckerberg touched on in the conference call, is that they need to, I think he said, "build the behavior" of people actually getting used to interacting with businesses through Messenger. I think that's probably the biggest challenge and also the biggest opportunity, because if you think about it, people aren't used to thinking of it like that. Lots of companies have, when you go to their website, they have this pop-up thing for a live chat, like, "Do you have any questions? Can I help you?" And that's one thing people are used to. But it's more like, that comes to you, that's in your face when you go to the website. I think that's what most people think of when they think about this idea of having a chat with the company. To completely change that model into, "Here's this one messaging platform where you can message your friends, but you can also message any company that you do business with and want to interact with, and they can do customer service or whatever it is that they want to interact with you about." But, I think behaviorally, it is a pretty big change. There's never been a platform like that before. To get people that actually warm up to that idea, in meaningful numbers -- with over a billion people on these platforms, you need to have a lot of them actually doing that type of behavior before you can really start turning on the monetization. I think that's going to be pretty tough because it's really unfamiliar to people. Not to say they can't do it. I believe in Facebook's ability to execute. But, I think that's going to be a pretty key piece of building this business, and it will be a big challenge. But, I think they will be able to pull it off eventually if they can get people to shift. There's a paradigm shift in thinking about how you interact with companies. People like to interact with companies on Twitterall the time, but it's a little bit different.

Lewis: Yeah, it's kind of changing how users expect to interact there. Two different ways management offered as possibilities and things they're investigating for monetizing these platforms, one of them was ads that display in News Feed, which is kind of interesting. It wouldn't be that they're appearing in Messenger or WhatsApp, but they would be ads to take people to those platforms and create communications with companies and brands. And then, the second one is paid content in Messenger. This is probably something that's a little bit easier to visualize, and it's something that's in the inbox or in other places on the platform, more standard ad placements. That's all we got from management in terms of commentary on that, so it continues to be a wait-and-see type thing. Thankfully, with Instagram and Facebook firing on all cylinders and being incredibly profitable, showing great growth, it's not something that we really have to worry about right now, but that will be the next phase of growth for this business, looking at the available user base there.

Niu: Yeah. I'll be interested to see what the mix looks like. Once they really start churning out monetization, what's driving the revenue? Is it going to be this business-interaction stuff or is it going to be paid content -- sponsored ads in some carousel? The problem with ads in messaging is it's a crappy experience. No one wants to look at ads while you're trying to communicate. Which they've acknowledged before. So, I'll be interested to see how that plays out, in terms of the shift. Or, if they have some other new ideas. A lot of the messaging companies in Asia have e-commerce, games. With games, I think, there may be some potential there, and they might be experimenting a little bit. But, yeah, it's still very much early days.

Dylan Lewis owns shares of Facebook. Evan Niu, CFA owns shares of Facebook. Evan Niu, CFA has the following options: long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.