Shares of Match Group (NASDAQ:MTCH), the parent company of Tinder, stumbled this week after Facebook (NASDAQ:FB) launched its new Facebook Dating platform in the U.S. The feature will appear as a new tab in Facebook's app and allow users over the age of 18 to create a separate dating profile.
Facebook Dating doesn't automatically link users to their Facebook friends. Instead, it lets users choose from "friends of friends" or users who are outside their Facebook circles. Users who are interested in their Facebook and Instagram friends can use a "secret crush" feature, which only matches users who like each other back -- similar to Tinder's system of matching swipes.
The platform will initially let users integrate individual Instagram posts into their dating profiles, and will integrate Facebook and Instagram Stories by the end of the year. Unlike Tinder, which generates most of its revenue from subscriptions, Facebook Dating is a no-cost, ad-free experience.
Match investors shouldn't be surprised by Facebook Dating, since the feature was announced last May at its F8 conference and had already gone live in 19 other countries. But the platform's massive audience, its integration with Instagram, and its lack of subscription fees all indicate that it could become a thorn in Match's side.
Why Facebook is going after Tinder
Facebook grew its total monthly active users (MAUs) 8% annually to 2.41 billion last quarter. But its total MAUs in the U.S. and Canada rose just 1% to 244 million, due to the saturation of the market and a series of privacy and security debacles.
That's troubling, because its users in the U.S. and Canada generated nearly half of its total revenue during the quarter. Facebook has been leaning heavily on Instagram's growth to offset that softness.
Instagram had 105 million MAUs in the U.S. last year, according to eMarketer, and 35% of U.S. teenagers ranked it as their favorite social networking app in Piper Jaffray's twice-yearly Taking Stock with Teens survey. Snap's Snapchat ranked first in that survey with a 41% share, while Facebook and Twitter tied in a distant third with 6% shares each. And 75% of Instagram's users are between the ages of 18 and 24 -- which overlaps a large portion of Tinder's core audience.
Meanwhile, Match is posting strong growth worldwide. Its family of dating apps, led by Tinder, grew its subscriber base 18% annually to 9.1 million last quarter. Tinder's total number of subscribers surged 41% to 5.2 million, with over 70% of subscribers now locked into its Gold tier -- which charges $15 per month for premium search and exposure features.
Facebook likely noticed that Match's growth rates were high, but that its total subscriber base was still tiny relative to Facebook's MAUs. It then probably realized that it could leverage its massive audience of Facebook and Instagram users to launch a rival dating platform -- and that it could afford to offer the service for free.
Facebook is targeting Match's soft spots
Unlike Match, Facebook generates most of its revenue from online ads. It stated that its Dating tab would remain ad-free, but the data accumulated from those interactions would still allow it to craft better targeted ads on Facebook and Instagram.
The new Dating feature could make Facebook's ecosystem stickier for U.S. users, attract new users, and boost the average time spent on the app -- all of which could boost the region's ad revenue. Furthermore, Facebook's expansion of the platform to other countries could curb Match's overseas expansion plans.
Match generated nearly half its revenue from international markets last quarter. It doesn't break down its revenue by country, but it claims that Tinder is a top dating app in Japan, while its second-largest app, OkCupid, is a market leader in India. It also recently launched Tinder Lite -- a lightweight version of the app that consumes less data and battery power -- across Southeast Asia.
Facebook's Asia-Pacific and Rest of World regions (accounting for 74% of its total MAUs last quarter) are both posting much stronger user growth than its U.S., Canada, and European markets. Like Match, Facebook offers a lightweight version of Facebook called Facebook Lite for developing markets.
It had already launched its Dating feature in several markets in Latin America and Southeast Asia, and it plans to launch it in Europe by early 2020. This expansion could cause headaches for Match, since price-sensitive users in lower-income markets could be drawn to Facebook's free service instead of Tinder's subscription fees.
Match investors shouldn't panic ... yet
Facebook boasts plenty of strengths, but Match has a first-mover's advantage in the market. Facebook's recent privacy debacles could also prevent users from filling out dating profiles, and many users likely prefer keeping their dating connections completely detached from Facebook -- even though Facebook Dating tries to keep them in separate silos.
The service could also struggle against Tinder for the same reasons Facebook's job-posting tool failed to topple LinkedIn. The latter had a first-mover's advantage, and its users weren't keen on blending their social and professional circles. Many Tinder users likely think the same way -- so Match investors shouldn't panic and head for the exits yet.