Verizon's (NYSE:VZ) Oath, the subsidiary that merged AOL with Yahoo's internet businesses last year, wants to challenge Facebook's (NASDAQ:FB) Messenger and WhatsApp in the mobile messaging space. Its play on this market is Yahoo's Squirrel, a group messaging app that lets users invite each other to different chat rooms.
An Oath spokesperson told TechCrunch that it was "experimenting" with Squirrel with a focus on "improving group communication in everyday life." Oath likely hopes that Squirrel's invite-only feature, which blocks the app from scouring a user's contact lists like other messaging apps, will address privacy concerns.
However, initial reviews indicate that early users are confused and frustrated by the restriction. Some users signed up, but gave up because they didn't have access to any invitations. That's admittedly an odd strategy for a mobile messaging app that relies on social connections.
Why is Oath making a messaging app?
Verizon acquired AOL and Yahoo's internet unit to diversify into internet advertising. Oath consists of over 50 media and technology brands, including HuffPost, Yahoo Sports, AOL.com, and TechCrunch.
That ecosystem generated $1.9 billion in revenues last quarter, representing a 13% sequential decline due to "seasonally lower" display advertising volumes. Oath only accounted for 6% of Verizon's revenues during that quarter, but Verizon believes that Oath's expansion could diversify its portfolio away from its slower-growth wireless and wireline units.
Verizon could also bundle more Oath features into its telco offerings to widen its moat against rivals like AT&T, which would evolve into a media powerhouse if it closes its planned takeover of Time Warner.
Oath recently updated its privacy policies to allow the company to scan users' AOL and Yahoo emails to craft targeted ads like Facebook and Alphabet's (NASDAQ:GOOGL) (NASDAQ:GOOGL) Google. However, Facebook's practices are now being scrutinized after the Cambridge Analytica scandal, and Google stopped scanning Gmail accounts last year.
Launching a mobile messaging app seems like a logical way to tether more users to Yahoo's ecosystem, which would hopefully translate to higher ad revenues. However, Oath is arriving late to the party with a crippled app that relies on a shrinking ecosystem.
Sorry Squirrel, Facebook already conquered this market
Facebook's WhatsApp hit 1.5 billion monthly active users (MAUs) in February, and it claimed to have one billion daily active users (DAUs) last July. Messenger topped 1.3 billion MAUs last September.
Yahoo's infamous data breach resulted in all three billion of its accounts being hacked, but the vast majority of those accounts were inactive. However, leaked data posted by The Information in early 2016 revealed that Yahoo Mail had just 56.9 million daily active DAUs at the end of 2015, while Yahoo's homepage only had 52.6 million DAUs.
Those figures, which were already declining in 2015, are probably much lower today. Even if we generously assume that Yahoo mail (which is used for logging into Squirrel) still has about 50 million DAUs, Oath will struggle to get even a sliver of those users interested in Squirrel -- and its "invitation-only" status will exacerbate the pain.
Even Google hasn't had much luck in the mobile messaging market. Google's latest efforts -- which include Hangouts, Allo, Duo, and a new SMS/RCS messaging app called Chat -- still haven't lured many users away from WhatsApp and Messenger.
To make matters even more confusing, Yahoo already has a messaging app. The mobile version of Yahoo Messenger ranks 160th on iOS and 117th on Android in social networking apps according to AppAnnie -- and it's highly unlikely that Squirrel will fare any better.
The bottom line
Verizon plans to grow Oath's user base, monetize it, and eventually bundle its features into an online video service. Unfortunately, dull "experimental" apps like Squirrel don't inspire much confidence in Oath's long-term growth -- which seems bogged down by the baggage of AOL and Yahoo's fading relevance in the tech world.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of AT&T. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Verizon Communications. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.