So far in 2014, Facebook (NASDAQ:FB) has released six new apps, bought another, and compelled hundreds of millions of users to download its Messenger app after removing the feature from its flagship app. Prior to 2014, the company operated just five apps including Instagram.
We may look back at 2014 as the year Facebook became an app company, not a social network. Looking forward to 2015, investors should expect Facebook to release even more apps, and they should be excited about the potential.
The three strategies of Facebook's app development
When Facebook releases a new app, it fits into one of three categories:
New features that connect with at least one well-established app (Facebook or Instagram)
Standalone apps that don't require a Facebook login
Each category has their merits, and there's a specific strategy behind each of them.
With unbundled features, the aim is to increase adoption and ease of use for features that people already use on Facebook. That includes things like Messenger, which saw adoption skyrocket from 200 million to 500 million after Facebook compelled users to download the app in order to use the feature on mobile. It also includes apps like Paper or Groups. These apps allow Facebook to improve the user experience over the flagship app, and feed user data back into its website or flagship app.
New features that use Facebook logins or Instagram credentials to use aim to improve the functionality of a popular app without compromising the user experience in that app. Hyperlapse and Bolt from Instagram are prime examples of this kind of app. These apps also help increase engagement on the main platform by taking up additional real-estate on a user's app launcher.
Finally, stand-alone apps are more like lottery tickets. The odds aren't very good that they'll succeed, but if they do, Facebook could have another billion user business on its hands. Examples of this include Slingshot and Rooms, which both capitalize on the growing desire for privacy and pseudonymity on the Internet and mobile devices.
Why should we expect more apps in 2015?
There's really no way of knowing which apps will become the next WhatsApp or what features will push Facebook to 2 billion active users. Facebook's best strategy is to throw everything at the wall (or app store as it may be) and see what sticks.
But there are two big factors working behind the scenes that give Facebook more creative freedom when it comes to building new apps. There's the company's ad network, which allows Facebook advertisers to reach audiences outside of the main Facebook website/app. And there's Atlas, the company's revamped demand-side platform that allows advertisers to target users across mobile apps, websites, and other advertising outlets.
These pieces allow Facebook to monetize any user base without requiring a Facebook login or gathering loads of data on its new app users. While Rooms, for example, may have some idea of your into based on what topics you follow and where you're most active, it doesn't collect any demographic information. With the combined forces of Atlas and Audience Network, though, Facebook can deliver highly targeted ads to Rooms users.
With more room to experiment outside of apps that unbundle and introduce new features for Facebook's bigger apps, we should see a slew of new products from Facebook that fall into the third category of apps: stand-alone apps. Facebook's omnipresence on smartphones puts it in a strong position, with Atlas and Audience Network, to monetize just about any app its engineers can think of.
Facebook can win the lottery
As I mentioned earlier, stand-alone apps are kind of like lottery tickets. For start-ups, these lottery tickets are extremely expensive. They put in tons of work with limited resources. For Facebook, though, lottery tickets are relatively cheap. It can hire a few engineers to work on a side project for a few months for much less than $1 million.
In other words, Facebook investors don't need to worry that these experimental apps will take time and money away from Facebook's main operations. A flop costs relatively little compared to the billions of dollars in revenue the company now generates in advertising. What's more, failures can still provide valuable data for Facebook to improve its flagship app and other popular apps in its constellation.
On the flip side, if Facebook creates a new app that does take off, it's in a position to turn it into a revenue generator relatively quickly compared to smaller start-ups.