Facebook Is Cannibalizing Itself

Facebook (NASDAQ: FB) now has 300 million daily active users (DAUs) on Messenger Stories and Facebook Stories. The company combined the two products in November 2017, enabling Stories posted on either Facebook or Messenger to show up in both apps.

Among its three Stories products -- Facebook Stories, Instagram Stories, and WhatsApp Status -- Facebook has over 1.15 billion daily active users. That's over six times the DAU count of Snapchat, as reported in Snap's (NYSE: SNAP) second-quarter earnings.

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That said, there's likely some overlap among Facebook's Stories products -- 68% of people say they use Stories on at least three apps regularly, according to a survey commissioned by Facebook.

But the phenomenal growth of the Stories format comes at a cost. The more time spent in Stories, the less time users are likely to spend scrolling through Facebook and Instagram's well-monetized Feeds. As Stories become a more popular way of sharing than posts in Feeds, Facebook is going to have to cannibalize itself to keep growing.

Monetizing Stories

Facebook has been running ads in Instagram Stories for about 18 months. It just introduced Facebook Stories ads, which will come to Messenger in the near future. Facebook will start showing ads in WhatsApp Status in 2019.

Facebook says the early results of Instagram ads are encouraging. It spouts a bunch of statistics about brand lift and ad conversion in its announcement for Facebook Stories ads.

But the important question is whether Stories ads perform better than Feed ads. As CEO Mark Zuckerberg pointed out during Facebook's first-quarter earnings call: "One of the interesting opportunities and challenges over the coming years will be making sure that ads are as good in Stories as they are in Feeds. If we don't do this well, then as more sharing shifts to Stories, that could hurt our business."

There are reasons to be optimistic that Stories ads are a better format. "It's full-screen, it's authentic, it's very engaging," COO Sheryl Sandberg said about Instagram Stories during the company's fourth-quarter 2017 earnings call.

But Snap's results with Snap ads in Stories tell a different ... story. Survey results show users aren't engaging with the full-screen Snap ads. And the financial results show disappointing revenue growth for the company. Advertisers have historically said Snap ads produce lower return on investment compared with Facebook and Instagram Feed ads.

The discrepancy could, however, come down to the targeting data available to Snap advertisers versus Facebook advertisers. Facebook's targeting data is significantly more valuable. Anecdotal evidence indicates Instagram Stories ads started out at comparable prices to Snap Ads, but have since jumped closer to the same level as Instagram Feed ads on a cost-per-impression basis. That's a good sign for Facebook as impressions shift from the Feed to Stories products.

The shift is just getting started

While 1.15 billion daily active users sounds like a lot, consider that Facebook has over 2.5 billion monthly active users on at least one of its four main apps. About two-thirds of Facebook's core users log into the flagship app or Messenger daily. Add Instagram and WhatsApp into the mix, and the percentage of daily users out of those 2.5 billion likely climbs even higher.

Also consider that most people consume and post stories across three different apps, and the total number of unique daily users for Facebook's Stories products starts to shrink. Overall, it's very likely less than half of Facebook's DAUs across its main apps use its Stories products.

If the trend is any indication, however, that's going to change. Instagram, and its 400 million daily Stories users, have likely already surpassed the 50% of DAU penetration level. Facebook's transition might be slower than Instagram's or WhatsApp's, but that's actually a good thing for the company. A slower transition allows Facebook to optimize Facebook Stories ads before the format overtakes News Feed ads entirely. That should enable it to successfully cannibalize itself without hurting revenue growth.

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Adam Levy owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.