Could This Be Facebook's Next Billion-User App?

Facebook's (NASDAQ: FB) Instagram could be building a new stand-alone app for online shopping, according to a recent report from The Verge, which cites two people familiar with the matter. The app, which might be called IG Shopping, could let users browse products from merchants they follow, then purchase them directly from within the app.

The move wouldn't be surprising, since Facebook has tried to challenge Amazon (NASDAQ: AMZN) with e-commerce features before. However, launching a stand-alone IG Shopping app would represent its most ambitious e-commerce effort yet.

Instagram already reaches over a billion monthly active users (MAUs), making it one of Facebook's pillars of mobile growth alongside WhatsApp's 1.5 billion MAUs and Messenger's 1.3 billion MAUs. Could IG Shopping evolve into Facebook's next billion-user app -- or will it suffer the fate of the company's other e-commerce efforts?

The evolution of Instagram

When Facebook bought Instagram for $1 billion in late 2012, many critics thought that it was a steep price tag for a photo-filtering app. However, the app's explosive growth from 90 million users in January 2013 to 1 billion by June 2018 silenced most of those criticisms.

Instagram subsequently added videos, private messages, and Snapchat-like Stories, filters, and ephemeral messages to its platform. It also launched several stand-alone apps, including the ephemeral messaging app Bolt, the time-lapse video app Hyperlapse, the looping video app Boomerang, the messaging app Direct, and the streaming video platform IGTV.

Facebook doesn't disclose Instagram's revenue, but KeyBanc analyst Andy Hargreaves estimates that it could generate nearly $9 billion in annual revenue this year (16% of Facebook's projected sales) and eventually $22 billion of revenue by 2022.

Facebook's e-commerce moves

Facebook dominates the social networking market, but it's failed to leverage that success to enter the e-commerce market. Facebook dabbled with Groupon-like local deals before, but pulled the plug after just four months in 2011.

That same year, it let companies open "Facebook Stores," but the effort fizzled out within a year. In 2012, it introduced Gifts, which let users buy gifts for their friends via integrated third-party sites -- but the platform was killed off two years later.

Facebook still operates Facebook Marketplace, but the platform is more of a Craigslist alternative than a viable competitor to Amazon or eBay. Facebook hosts over 60 million active business pages across its network, but adding "buy" buttons to pages, posts, and ads didn't attract many shoppers.

Facebook also integrated chatbots and a payment platform into Messenger, which let users directly order products from merchants through conversations. Unfortunately, users weren't used to ordering products from those chatbots -- many of which were poorly designed and caused more frustration than traditional shopping apps.

But it might have more success with Instagram

Yet Facebook could have more success by integrating e-commerce features into Instagram. In late 2016, it started letting businesses tag photos of products with "shoppable" links that lead to a checkout page. It's also testing a similar feature for Instagram Stories, and it recently started testing a native payments feature for select users.

Facebook states that over 25 million businesses already have Instagram accounts, and 2 million of them buy ads on the platform. Instagram also claims that four out of five of its users follow at least one business.

Facebook likely realizes that it can turn Instagram into a shopping app, but it doesn't want to dilute its identity by adding too many e-commerce features. Therefore, it makes sense to spin out those features as a stand-alone app, which can then be expanded into a full-featured marketplace.

Could this be Facebook's next billion-user app?

When Facebook spun off Messenger as a stand-alone app in 2011, some critics claimed that it fragmented its ecosystem. But over half of Facebook's total MAUs now use the Messenger app -- which is gradually expanding into an all-in-one platform for mobile payments, games, and other services. Therefore, IG Shopping might eventually become a billion-user app.

However, Facebook's past e-commerce failures indicate that many users are still going straight to Amazon to buy products. Facebook also lacks an effective way to challenge Amazon Prime, which topped 100 million subscribers earlier this year. Investors should keep an eye on Instagram's e-commerce ambitions, but they shouldn't expect the platform to help Facebook challenge Amazon anytime soon.

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