Get Ready For Ads on Facebook Messenger

Last week, news site TechCrunch leaked information about Facebook's (META 0.43%) upcoming plans to monetize the Messenger app. 

In this week's Technology Industry Focus, Sean O'Reilly and Dylan Lewis run through the details we do know, talk about Facebook's blueprint for monetizing platforms, and speculate as to what this might mean for one of Facebook's other properties.

A full transcript follows the video.

This podcast was recorded on Feb. 19, 2016. 

Sean O'Reilly: Get ready to see ads when you're talking to your college buddies on Facebook Messenger, on this tech edition of Industry Focus.

Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Friday, February 19th, 2016. Joining me to chat about Facebook's plans for world domination is the one and only Dylan Lewis. What's up, man?

Dylan Lewis: Hey. It's great to be back in the studio with you. We had that week off where I was with Kristine on the healthcare show.

O'Reilly: I know, it was weird.

Lewis: You had Kristine on the tech show.

O'Reilly: Which was ... Did you listen to that yet?

Lewis: I haven't listened to it yet.

O'Reilly: It was a really good time. We talked about SaaS software companies in the healthcare sector, and I kind of want to go buy some. Well, she said a really good line: healthcare's really one of the only things in our society that hasn't really been disrupted by tech yet.

Lewis: Seems like it's ripe for it.

O'Reilly: Yeah. No, exactly. That's the point. Anyway, big news out of Facebook this morning. I don't know, I got pretty wide-eyed, like, "Oh, dear God, they're doing it." Facebook's planning to monetize its Messenger app.

Lewis: Yeah. This came out earlier in the week.

O'Reilly: Okay, fine.

Lewis: Not this morning, just to be clear.

O'Reilly: I heard about it today. I guess I'm not as in the know as you are.

Lewis: That's why you host the show, Sean.

O'Reilly: Yeah.

Lewis: No, but I'm very excited to get back into the tech routine. I'm wearing my festive blue Facebook shirt just to discuss Facebook.

O'Reilly: Oh, God. I didn't even make that connection.

Lewis: Neither did I until I decided to say that. Yeah, so TechCrunch got ahold of this document that details Facebook's plans.

O'Reilly: How do they do that, by the way? Do they have like a spy?

Lewis: They have sources. I think some of these with reporting, some of it's a strategic source. Sometimes you have people that are intentionally leaking things out to very select outlets ...

O'Reilly: Good Lord. Okay.

Lewis: ... so that buzz gets built up. I don't know. There's a whole cottage industry of that.

O'Reilly: Yeah.

Lewis: TechCrunch got ahold of this document that details Facebook's plans to launch ads in the Messenger app, ideally in Q2 of 2016, so coming up soon. This would be the company's first efforts to monetize the 800 million-user property, and could probably lay the groundwork for monetizing WhatsApp as well.

O'Reilly: Cool.

Lewis: Facebook's comment in response to the article: "We don't comment on rumor or speculation. That said, our aim with Messenger is to create a high-quality, engaging experience for our 800 million people around the world, and that includes ensuring people do not experience unwanted messages of any type." I think that makes it clear that ...

O'Reilly: They're doing it.

Lewis: ... they're doing it.

O'Reilly: That is exactly what you would say if you were doing it.

Lewis: Right. "We're not going to say we're not doing it, but we're doing it."

O'Reilly: " ... but we're doing it."

Lewis: As to what the actual ads will look like, individuals that have communicated with a business via Messenger in the past can be targeted for these ad messages, and they would be things like possibly sales promotions, announcing new products, coupon codes, things like that. One of the things that I think is very interesting is they have this mandate that you have to have been in touch with this company beforehand, and it sounds like it needs to be user-initiated contact.

O'Reilly: Which makes this move definitely less onerous than at first glance, because we all remember back in the days when AIM, AOL Instant Messenger, was struggling, and this is 10-15 years ago now, but they just crammed ads down your face. There was always an ad there, and it was like, "Why am I seeing this? It makes no sense. I've never used this product." I don't know, it was probably one of its downfalls. At least it's ... If I'm a Comcast, I'm just throwing that out there, I don't know, but if I use Facebook Messenger to communicate with Comcast and then they show me a bundle on it, it's less crazy.

Lewis: Messaging apps, I think the potential for ads can be even more invasive, right?

O'Reilly: Right.

Lewis: Because with your average online browsing experience, you know in the side, maybe up top in an article and then down at the bottom of an article, possibly even interrupting an article, you're going to see something. It's just part of the flow of browsing.

O'Reilly: Unless you have a really good ad blocker.

Lewis: Unless you have a really good ad block. With messaging apps, it's weird to get notifications for something that is a solicitation.

O'Reilly: Right. "I'm just trying to talk to my mother about my son, go away."

Lewis: You'll get push notifications for an app, but that's getting you to reengage with the app, it's not trying to sell you something necessarily, and so it's a little different. One thing that is not totally clear is if people can just totally sidestep this by not engaging with businesses at all.

O'Reilly: Right.

Lewis: Because I don't know about you, I have not ever messaged a business on Facebook Messenger.

O'Reilly: That's just it, because when did Facebook split off Messenger from the Facebook app? Was this like, I'm totally guessing, 8 months ago? I don't know.

Lewis: I think it was a little bit more than that.

O'Reilly: Okay. Let's call it a year, whatever. Here's the deal. Facebook Messenger is not part of my daily routine all the time, in the way even that, heck, when I was in high school everybody was on AIM. Everybody. Do businesses have an incentive to use Facebook just so they can have this layup connection to the customer, or what?

Lewis: Yeah, I think the value proposition here for the businesses is, like I said, you can use it to promote sales, announce new products. I think also there's this nice potential for nudging people that might've abandoned orders. I actually used to work for an online retailer, and one of my jobs in working for that online retailer was looking at abandoned orders and looking for trends in those. That is something that they spent a lot of time ...

O'Reilly: Was it Amazon, Dylan?

Lewis: It was not.

O'Reilly: Did you work for Amazon?

Lewis: It was an online Zappos type competitor.

O'Reilly: Okay. I was going to be like, "Did you sell fireworks online, or what'd you do?" Is part of the deal going to be .... Because the only way I see this working is if Facebook says to, I'm just going to keep going with my Comcast example ... I love Comcast chat function. That way I don't have to be on hold on the phone. It's awesome.

Lewis: Yes.

O'Reilly: Do they go to the business and be like, "Here's the deal. Use Facebook Messenger for your online chatting customer service, and in exchange you can send current Comcast customers an ad occasionally." The only way that works is if Comcast only uses Facebook Messenger.

Lewis: I don't think it's going to be an exclusive arrangement like that.

O'Reilly: It isn't? Oh, man.

Lewis: It's just more of an add-on, another channel for these businesses to communicate.

O'Reilly: Okay.

Lewis: One of the things that's been clear is that Facebook wants to supplant the 1-800 hotline that all these businesses are using.

O'Reilly: Right.

Lewis: To your point, it is way better ... I know like when I communicate with Verizon about something, I live chat. I just have it up on the side.

O'Reilly: I can multitask.

Lewis: I do all the regular Internet stuff that I want to be doing, and as the person gets back to me we have the conversation. I'm not sitting there on hold just walking around my apartment waiting and pacing.

O'Reilly: Right.

Lewis: It is a much better experience.

O'Reilly: Then you have a record. They send you transcripts.

Lewis: Exactly.

O'Reilly: It's all good.

Lewis: Yeah, it's a lot easier to go back to a business and say, "Well, you promised me this, this, and this, and I only got this," and say, "take care of this situation."

O'Reilly: Right. It's even better for the customer service rep, because if you have something in front of you that's like a chat with a customer or whatever, it seems to me like if I was on the other end of that, if you're having a conversation on the phone it's like, "Oh, crap, I have to respond to the customer immediately if they ask me a really tough question, or just 'when will I get service?' or whatever." With this, it's like, "Okay, I can read it and then I can do my ... " It's easier to communicate, I guess. I don't know.

Lewis: It also enables richer communication.

O'Reilly: For sure.

Lewis: Rather than just having this verbal back and forth, you can send links, you can send maps to where the nearest store is. There's so much more built out functionality there.

O'Reilly: Yeah.

Lewis: One of the things that I think this fits really well into is Facebook's hyper-local focus and what they're doing with small businesses.

O'Reilly: Right.

Lewis: Say as an example you are walking around in Old Town or something like that with your family, and, I don't know, there was a boutique that you stopped into and got shirts for the IF show.

O'Reilly: How'd you know about my plans?

Lewis: Maybe you pinged them one time about a return policy or something like that just in case, but if you're within, I don't know, half a mile of that store, they could ping you with a coupon code or they could ping you saying, "We have that same shirt in a different color," or something like that.

O'Reilly: Right.

Lewis: This is not an announced intention of the plan, but it seems like a very natural integration for stuff they're already doing.

O'Reilly: What's the market reaction been? Because when I saw this, I was like, "Oh, God, they're going to make tons of money."

Lewis: Yeah. It seems pretty muted.

O'Reilly: Yeah, it was only up like 1%. I was like, "Really? That's all?"

Lewis: I know people were expecting them to be monetizing Messenger at some point.

O'Reilly: Right. It was probably priced in.

Lewis: I guess there was an element of it being priced in, but I was definitely expecting a little bit more enthusiasm surrounding this, especially because a lot of what the company has said in the past about ways to monetize messaging apps has been counter to what they're doing here.

O'Reilly: Right.

Lewis: Actually, Mark Zuckerberg in 2014, I think this was right around the WhatsApp acquisition period, said, "I don't personally think that ads are the right way to monetize messaging."

O'Reilly: Sheryl Sandberg has a different idea. No, I'm just kidding.

Lewis: That echoes Jan Koum, who is the co-founder of WhatsApp, in 2012: "Advertising isn't just the disruption of aesthetics, the insults to your intelligence and interruption of your train of thought."

O'Reilly: Wow. What a quote. Can I read that again for our listeners? The founder of WhatsApp said in 2012, "Advertising isn't just the disruption of aesthetics, it's the insults to your intelligence and interruption of your train of thought." I butchered that, but wow.

Lewis: Yeah. It had been pretty clear for a while that it did not seem like this was the plan.

O'Reilly: Right. What else were they going to do?

Lewis: Yeah, especially with them moving away from the subscription model with WhatsApp.

O'Reilly: Right. Yeah, they got rid of that dollar a month fee, so that's $400 million they're not getting per year or whatever. Anyway.

Lewis: Yeah. That's something we can get into the second half of the show.

O'Reilly: Right. Cool, yeah. Before we move on to talking about what's going on with Facebook's other properties, I wanted to point our listeners to the newly redesigned focus.fool.com. There you'll discover a special offer to join the The Motley Fool's Stock Advisor newsletter to start your year off Foolishly. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to focus.fool.com to take advantage of this offer. Once again, that is focus.fool.com.

Dylan, up till now we've just been talking about Facebook's evil plans to monetize Messenger. What's going on with WhatsApp? Because they spent $21-$22 billion on this thing that generated very little revenue, and now it generates none. What's going on there?

Lewis: Yeah, and that's the natural parallel here, is like, "Okay, they're announcing this messenger, that means somewhere down the road this is probably what's going to happen with WhatsApp," right?

O'Reilly: Right.

Lewis: The services are very similar. WhatsApp decided to drop its subscription fee model in early 2016. Just as a reminder, the way that worked was for some countries you had a free year of service, and then beyond that first year you were paying 99 cents a year to access it. Some countries you had to pay 99 cents per year regardless of how long you'd been using it. They abandoned that model in early 2016. Here's what they announced, and I think it also lends some credence to the idea that we should've seen this monetization plan coming: "Naturally, people might wonder how we plan to keep WhatsApp running without subscription fees and if today's announcement means we're introducing third-party ads. The answer is no. Starting this year, we will test tools that allow you to use WhatsApp to communicate with businesses and organizations that you want to hear from. That could mean communicating with your bank about whether a recent transaction was fraudulent, or with an airline about a delayed flight."

O'Reilly: That's not bad. Yeah.

Lewis: They say, "We're not introducing third-party ads," but parsing that out, that really doesn't sound all that different than what Facebook is planning with Messenger.

O'Reilly: Right.

Lewis: The "you want to hear from" is kind of what you're keying in there, right?

O'Reilly: Right.

Lewis: Who's to say what you want to hear from? If you were to reach out to a business about something, they could say you want to hear from them. This is a business you're actively engaging with. It sounds to me like they're kind of using that as a catch-all for ads and sponsored messages.

O'Reilly: Oh, man. Yeah, yeah, yeah.

Lewis: That messaging and what they're doing now with Messenger and the way that they're messaging this just comes across as what we're seeing rolled out here with Messenger is probably the blueprint for what's going to happen with WhatsApp. It might be slightly more business-focused, but ideally it's going to wind up being the same thing.

O'Reilly: The question that I'm sure is on everybody's minds is, because it was definitely on mine, is there going to be user blow-back? Because if they really hit me up, I will not use Facebook Messenger. I don't think I need to. I don't use it all the time. The last time I think I used it I talked to a friend from high school the other day, and then I used it to reach out to a friend from college and meet him up for a drink because we hadn't talked in a few years like a month ago. It's not required for my life.

Lewis: Right. I don't know. If you're in the US, unless you have a lot of international friends or, I don't know, people coming into your life that you don't have the phone numbers of, you can get by without Facebook Messenger.

O'Reilly: Right.

Lewis: A lot of the appeal of WhatsApp and Facebook Messenger is that they are international services that can connect people that might not be able to text otherwise.

O'Reilly: Right.

Lewis: I think that's a legit concern. I do think the way they're structuring it, it seems to hedge on that, and I think that Facebook's been very smart and very deliberate in how they have decided to monetize their platforms in the past. There's actually this great breakdown from most recent conference call of the playbook for developing and monetizing a platform as according to Mark Zuckerberg. I figure it'd be nice to run through that and just explain what his process is here and I think why they've been so successful with Facebook and then Instagram.

O'Reilly: Okay.

Lewis: His first step he identifies is build a great consumer experience. Basically, you're helping people share things in a new way. That's his description for that. Second step, introduce organic ways that people can interact with businesses. He points to Facebook and the pages as an example. Those started out as non-ad-based, just like, "You can build up a web presence as a local business or as a large company and people can interact with you. They can comment on stuff. You can post things about new products, things like that, but it is not so intense. You are choosing to follow these companies, and you are getting news and updates about those companies."

O'Reilly: Right.

Lewis: Once you have this very ramped-up participating base of companies, then step three is start dialing up advertising. He says you want that to be good, feel good, and have it be part of an experience, because these are all people that you're already participating with and interacting with.

And so, it seems to me that there's a real focus on building up this community and experience that already has people doing a back and forth with businesses, and then choosing to monetize it. When you see them saying, "Okay, we're only going to allow people to be approached with ads from businesses that they've reached out to," they're following this blueprint exactly.

O'Reilly: Got it.

Lewis: I don't know. You look at the success that they've had with Facebook and then porting that over to Instagram, and they've been wildly successful. One of my favorite quotes from The Social Network is they're talking about monetizing Facebook, and I think Eduardo Saverin's character is talking about paying for the party and the character that Justin Timberlake plays, I forget ...

O'Reilly: Sean Parker.

Lewis: Sean Parker, he's like, "Well, how big do you want the party to be?" It's like, "Don't worry about paying for the party yet, just make the party as big as possible and then worry about paying for the party," basically.

O'Reilly: Right.

Lewis: That's something they've been really excellent at.

O'Reilly: This is a really big party. This is an 800-million-person party.

Lewis: Yeah. I think they've just nailed execution with this stuff in the past, and I don't think it's going to be this overwhelmingly invasive thing.

O'Reilly: Yeah. Facebook itself, obviously there's way more ads then there used to be on there when we first got Facebook, and of course they sent me that ad for the T-shirt that one time that was geared to me.

Lewis: What was that?

O'Reilly: It was the Ohio state flag in the shape of the state of Virginia, and it says, like, "Born in Ohio, living in Virginia." I'm just like, "Oh, my God."

Lewis: You and 300 other people must have been psyched to see that T-shirt.

O'Reilly: I was like, "What? You know everything about me. Go away." Yeah, but it hasn't been terrible. Other than that creepy, creepy T-shirt, it hasn't been terrible. It's not invasive. It's not insane when I scroll down the news feed or anything.

Lewis: Yeah. They've managed ad load very well. I think one of the other things with these free platforms, something we talk about on the show every now and then is there is a certain social contract, I think, that comes with a company making something for free and making it available to consumers for free. There's the expectation that there will be ads somewhere.

O'Reilly: Right.

Lewis: If I'm listening to all of my music for free on Spotify, I am going to expect that there are going to be ads in there, because that's the model that I'm accustomed to. It's no different than a radio.

O'Reilly: Right.

Lewis: I think that people have an appetite for that, and they're willing to take something at no cost if it means having some interruption here and there, a little bit of noise, if it's well-managed. I really wouldn't worry about the customer experience side of things. I don't think it's going to be too bad. As an investor, I think you have to love this.

O'Reilly: That's the million dollar question, because its stock's just over $100, all-time high. Mark Zuckerberg's worth, I don't know, $45-$50 billion. It's just winning all around

Lewis: Yeah. They've taken their flagship platform, monetized it incredibly well. They've started taking the learnings from that and applying it to Instagram and building up the ad load there, and, again, doing it in a very manageable, user-friendly way. Now they have these two other properties, one with 800 million users, one with I think about a billion users on WhatsApp, and they're going to start monetizing them. Here's the blueprint for how they're going to do it. There's going to be a lot of crossover with ... it's not 1.8 billion new people being exposed to ads, but these properties with huge, huge user bases now being monetized. As an investor, you have to love it.

O'Reilly: That's awesome.

Lewis: Yeah.

O'Reilly: Cool. Well, thanks for your thoughts, Dylan!

Lewis: No problem, Sean.

O'Reilly: If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. Again, that's [email protected]. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I am Sean O'Reilly, thanks for listening, and Fool on!