As Facebook (NASDAQ: FB) starts running out of real estate to place ads in its flagship app, it's opening up more in Messenger. The company announced plans to expand its Messenger ads globally after a successful test in Australia and Thailand earlier this year.
Messenger and its 1.2 billion monthly active users present a massive opportunity for Facebook to keep growing. And considering Messenger ads will rely on the same platform as Facebook and Instagram ads, there are millions of advertisers that already have everything set up to buy into the new ad format. That will be key to continued revenue growth at Facebook.
Continue Reading Below
Same ads, new place
The big opportunity with Messenger ads is that advertisers don't have to change much to take advantage of ads in the app. The ad inventory in Messenger is just another placement option for Facebook ads similar to the third-party apps that use Facebook's Audience Network to monetize their apps. Advertisers will be able to buy Messenger ads using the same exact tools they use to buy Facebook and Instagram ads.
As such, Facebook doesn't have to do much work to attract advertisers to the platform. The challenge is in helping advertisers produce strong returns on their investments in the ad units. Considering the tests in Thailand and Australia performed well over the past six months, Facebook appears confident Messenger can deliver for advertisers.
Ads that prompt users to start chatting with a business could be particularly useful for businesses within Messenger. These ads have been available through Facebook for some time, but ought to be more effective within Messenger itself. Further improving their efficacy is Messenger's other ad product, Sponsored Messages, which allows businesses to send unprompted messages to users if they've previously had a conversation.
Facebook will have to balance ads in Messenger to ensure it doesn't negatively impact the user experience. Barraging users with unprompted Sponsored Messages or cramming their home screen with ads instead of conversations with friends will certainly turn users off of the app altogether. To be sure, Facebook will ramp up Messenger ads slowly, just as it did with Facebook and Instagram ads, which now produce billions in revenue.
No more room for ads on Facebook
Facebook's decision to open Messenger ads globally coincides with the timing of Facebook lapping CFO Dave Wehner's announcement of ad load saturation on its flagship app. In other words, the number of ads users see in their News Feeds hasn't increased in a year. It was a big driver of revenue growth at Facebook, but Wehner told analysts they should expect growth to slow meaningfully in the second half of this year.
Messenger ads could provide relief for that challenge, and the timing (very likely not coincidentally) couldn't be better. Granted, Messenger ads will ramp slowly as advertisers and Facebook continue to learn best practices. But they provide some breathing room for Facebook to keep growing the number of ads seen per minute across its portfolio of apps. Users spend an average of over 50 minutes per day across Facebook, Instagram, and Messenger.
What's more, success with Messenger ads could open the door for a similar monetization technique with WhatsApp, which has another 1.2 billion monthly users. Facebook doesn't include WhatsApp in its time-spent metric, but it notes WhatsApp and Messenger often have different use cases for people, with Messenger used to chat with friends and WhatsApp used to chat with others. As such, the potential for monetization in WhatsApp could be even greater than Messenger since users are already accustomed to chatting with businesses and having less-casual interactions on the app.
How Facebook can move forward
Overall, Messenger ads are big opportunity for Facebook to keep growing its ad revenue despite the challenges it faces with its flagship app. Investors should expect a slow ramp of ads on the platform, and it may take several years for Facebook to take full advantage of the opportunity. At the same time, Facebook has plenty of other growth avenues (video, WhatsApp, virtual reality, etc.) to move down the pipeline to ensure steady growth for the long term.
10 stocks we like better than FacebookWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Facebook wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of July 6, 2017