For a social network, relevance with the audience is the most integral business strategy and as such, companies spend millions on innovations to ensure relevance and sustainability. Additionally, the competition that currently exists in the social-networking market is severe and threatening. Maybe this is the reason why Facebook (FB) has always been agile with innovation and tried to come out with features and services that are relevant for users. Recently, though, there have been apprehensions that services like Snapchat and Twitter (TWTR) are wooing young customers away from one of the oldest social networks. Let us analyze if this is indeed the case and how Facebook’s prospects pan out in the future.
Losing on the young audience
As per a recent report from the Wall Street Journal, Snapchat has entered the elite club of social apps after it hit the 100 million monthly users as per company’s internal reports. Though this number is miniscule when compared to Facebook’s 1 billion-plus number, the growing popularity of Snapchat suggests that the network’s interface is finding good place with users, of which a considerable chunk is teenagers. Since early 2014, Facebook has seen considerable departure of its young audience that is represented by an age group 13 to 24. Even CFO David Ebersman informed the analysts that the social network did see a decrease in teenage daily users during the first couple of quarters in 2014.
The population aged 13-17 years and 18-24 years roughly made up a good 38% of Facebook’s overall user base in the beginning of 2011. Since then, this percentage reduced to approximately 28 percent as the network lost a heavy chunk of its teenage population, especially users under 18 years of age. This is not something that will affect Facebook’s revenue stream with a huge impact, because the company has a diverse user base and therefore the data possessed by Facebook helps the company in building a robust product portfolio for advertisers.
As is widely known, Snapchat’s unique selling point is the ability of the network to maintain confidentiality and thereby avoid the risk of private data leak from the phones. Additionally, Snapchat has further refined the level of communication by keeping the length of shared videos to 10 seconds and word count to 10 words at most (Twitter has a 140-character limit). Not to deviate further, the point I intend to convey is that Snapchat has been quite successful in improving the relevance of social network with the intended audience and may be this is the reason that the company is being valued at north of $10 billon.
Instagram and Whatsapp are Facebook’s best defence
As I mentioned in the beginning, Facebook has to be persistent with its innovation efforts so as to maintain an user base that is active. A couple of Facebook’s strongest tools are Instagram and Whatsapp. Recently, Instagram reported that it reached a major milestone with more than 300 million monthly active users. This is even more than Twitter, which is roughly valued at around $29 billion and has approximately 271 million monthly users. Instagram users are sharing over 70 million photos and an average of 2.5 billion "likes" every day. According to Instagram, 70% of its users are located outside the United States. Its users have already shared more than 30 billion photos.
Instagram is drawing customers at a phenomenal pace and because of that, it is capable of adding tremendous value to Facebook’s overall revenue. Besides Instagram, Facebook’s recently acquired messaging service Whatsapp has more than 600 million monthly active users and compensates for weakening growth in Facebook’s core messaging app. While the $19 billion deal under which Facebook acquired the messaging app has been criticized by analysts over concerns like excessive valuation, ambiguous revenue stream etc., the social giant has shown confidence in the deal. As this Techcrunch article also reports, when Facebook broke out financials for its Whatsapp acquisition deal, the result was disappointing, Whatsapp brought in just $15 million in revenue in the first half of 2014 despite having 600 million users.
Yes, this is definitely disappointing because at this number, Facebook’s payment of $19 billion translates to a multiple of 1267x over revenue. Yet, there is a general consensus that Facebook will make use of the messaging service and its large database in a way that will also preserve its intention of not putting ads on Whatsapp. For one, Facebook might just make the use of the coveted data in conjunction with its own database and create a novel advertising platform. The crux however is that Whatsapp currently remains one of the most widely-adopted messaging apps and hence, there is immense potential for Facebook to monetize the same in some way.
Final Take
Facebook has become a crown jewel in the world of digital advertising. Agreeably, there are concerns over the demographics and sustenance of its user base, but it is not something that will impair Facebook’s prospects in a big way. The recent departure from showing Bing results with Facebook search also highlights that the company is looking at expanding its internal search platform. Though Facebook has immense user data, in order to be more useful to advertisers, there needs to be data on when a person intends to buy and what. This can be achieved by tracking keyword searches (like Google does) and therefore, this move assumes a lot of significance.
