Facebook (NASDAQ:FB) management has usually avoided calling out competitors by name on its earnings calls. It's rare that the company focuses on any specific competitor instead of just its own products.
However, on Facebook's third-quarter earnings call, CEO Mark Zuckerberg called out two competitors in particular that Facebook sees as challengers to its success over the next few years. With regard to growing Messenger and WhatsApp, Zuckerberg sees Apple's (NASDAQ:AAPL) iMessage as the biggest product standing in its way, particularly in the United States. In its efforts with video on Facebook Watch and IGTV, Zuckerberg called out Google's YouTube, part of the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) conglomerate.
Calling out Apple
Zuck pointed out that Facebook's messaging apps, WhatsApp and Messenger, are the leading messaging platforms in most countries. But in countries like the U.S., where the iPhone accounts for nearly half of the smartphone market, iMessage has a significant lead. That's because Apple makes iMessage the default messaging app on iPhone, integrating standard SMS into the same app.
That's a subtle hint that Zuckerberg thinks the actions of Apple may be similar to what Microsoft did in the early 2000s by bundling Internet Explorer with Windows. The case is very different, though, as Apple gives away iOS for free and doesn't offer iMessage on any non-Apple platform. Microsoft, on the other hand, charged for Windows and also developed Internet Explorer for other operating systems.
In countries where Android has a much larger share of the market, Facebook dominates. Zuckerberg says one of the main reasons for the popularity of its apps, particularly WhatsApp, is its record on privacy.
Apple also holds data privacy in high regard, but Zuckerberg took at a shot at Apple by referencing the fact that it stores encryption keys for Chinese iCloud users on Chinese servers. That makes it possible for the Chinese government to access some users' iMessages directly instead of being required to go through the U.S. legal system. However, he didn't mention that Facebook doesn't officially operate in China (and it would likely be held to the same standards if it did), or that Facebook has faced numerous data privacy challenges this year.
Apple's continued improvements in iMessage and the dominance of iOS in valuable markets like the U.S. could curb the monetization capabilities of Messenger and WhatsApp. Importantly, though, Facebook is taking an approach to monetization that relies on a relatively unique use case: interacting with businesses. iMessage is used for interacting with friends, but Messenger and WhatsApp have a growing number of business-to-consumer interactions. Apple has tried to make iMessage a business communication tool in the past, but it hasn't caught on. That's where Facebook will make its money even if it doesn't capture 100% of messaging.
Building the next YouTube
Facebook's video strategy has changed meaningfully over the last couple of years. While it originally grew video views in its feed products, management started changing course last year. In an effort to reduce passive consumption and focus on the unique value proposition of Facebook -- connecting people -- Facebook changed its feed algorithms and started directing passive video consumption to Watch and IGTV.
Watch and IGTV currently contain a lot of professionally produced content. By comparison, YouTube has a mix of professional, semi-professional, and amateur content. Facebook wants to make Watch and IGTV a place for all types of videos, but it's currently spending money to seed the Watch ecosystem and attract viewers. The efforts are starting to pay off as Zuckerberg noted that Watch grew users 3 times over the last few months. Still, it's a long way away from YouTube's 1.8 billion users.
Migrating video views to Watch and IGTV could have a deleterious impact on revenue growth at first, as Zuckerberg points out the revenue per minute spent watching video is less than that of scrolling through a social feed. But if Facebook can grow the Watch and IGTV communities into self-sustaining content engines, it could be a highly accretive source of revenue. YouTube generates an estimated $15 billion in revenue, and that might be on the conservative side.
Facebook will need to continue investing in ad products for Watch and IGTV as well as its messaging platforms. Zuckerberg said video and messaging are two of the company's biggest challenges and opportunities going forward. While YouTube and iMessage represent considerable obstacles, there's still a great opportunity for Facebook to grow and monetize its video and messaging apps in spite of their competitors' massive user bases.