Many see Tencent’s (OTCMKTS:TCEHY) WeChat as a model for messaging apps, such as Rakuten Inc’s (OTCMKTS:RKUNF) Viber and Facebook Inc’s (NASDAQ:FB) Messenger and WhatsApp. Increasingly, it looks like that future is starting to arrive.
WeChat, with 768 million monthly active users, has evolved from a simple chat app into something better described as a mobile operating system.
WeChat users in China enjoy a seamless mobile experience. They can message their friends, shop, hail a taxi, check their bank accounts, pay utility bills, order food and get tickets to a movie, all without ever leaving the app.
WeChat’s importance to its millions of users led HSBC to value the app at a whopping $83.6 billion in 2015.
Ever since Facebook hired PayPal Holdings Inc (NASDAQ:PYPL) CEO David Marcus in 2014 as head of Facebook Messenger, its “WeChat-ification” has become more noticeable. After taking charge, Marcus cited Asian apps such as WeChat and Line as inspirations. Soon, Facebook added payments, shopping and a marketplace for buying and selling akin to Craigslist. Additionally, Facebook users can now order food and buy movie tickets through the app.
Likewise, in December Viber integrated banking into the app. Users can send and receive money within Viber by talking to chatbots, and this promises a new era of digital banking. Recently, Viber hired mobile advertising expert Djamel Agaoua as CEO. According to Bloomberg, in the new version of Viber (to be released in March) users will be able to make reservations at restaurants.
And we can also expect e-commerce to play a role in Viber’s future. Rakuten, Viber’s parent company, is an e-commerce giant often dubbed “the Amazon.com, Inc (NASDAQ:AMZN) of Japan.” When it bought Viber in 2014, Rakuten made clear its plans to eventually integrate the app into Rakuten’s ecosystem.
Well, all of this is very nice, but will it have a material impact on either company’s finances? How will Facebook and Rakuten benefit by imitating WeChat’s business model?
When you add more functions to an app, users will spend more time on it, doing things such as booking doctor’s appointments, playing games and chatting with friends. The more time users spend interacting with the app, the greater the potential ad revenue, and this means serious money for the app’s parent company.
How much time could users spend on these apps? In 2016, Mark Zuckerberg reported that users spend, on average, 50 minutes a day on Facebook, Instagram and Messenger. However, half of WeChat’s users spend more than 90 minutes a day on the app. If users spend that much time on Facebook, it means more advertising dollars for FB.
And this promises not only more ad revenue, but also more opportunities for monetization other than ads. In contrast to Facebook, WeChat only began testing ads in January 2015 — four years after its release. Prior to that, it made money off of games sales and payments within the app.
Broadening its revenue sources is crucial for Facebook. FB’s reliance on ad revenue remains its Achilles’ heel. Advertising accounted for a whopping 97.2% of Facebook’s sales in 2016. Investopedia listed Facebook’s overdependence on ad revenue as one of the biggest risks of investing in Facebook stock.
WhatsApp could benefit as well by adding more functions. The venture capitalist Connie Chan noted that WeChat’s average revenue per user was 7 times that of WhatsApp. Equity prices are based on the risk-adjusted potential for return, so diversifying its revenue sources would reduce risk and boost the price of Facebook stock.
Who Will Win This Race?
For now, this contest is probably Facebook’s to lose. Facebook’s growth recently picked up, and now it is approaching 2 billion users. Last year, Facebook Messenger reached 1 billion users. Facebook also owns WhatsApp, which has another 1 billion people active users. Viber boasts 800 million users, with 267 million active users.
For social network and messaging apps, size matters. This is known as the network effect: the bigger you are, the more likely you are to win, since the value of a social network depends on how many people are interacting with it. If all of your friends and family are using an app, you will have to use it as well to keep in contact with them.
If Facebook continues evolving into a mobile operating system like WeChat, it will boost Facebook’s revenues and stock price. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL) should worry, since Android and iOS risk becoming irrelevant in a world where one app can do everything.
However, Facebook should not get lazy and rest on its laurels, lest it risk losing ground to Viber.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.