At Facebook's (NASDAQ:FB) F8 developers conference in March, the company launched Messenger Platform, which enables developers to integrate their apps with Facebook Messenger. The move allows an app's content to be shared through Messenger so that only one party needs to install an app for it to provide functionality -- like inserting videos or GIFs. This provides an easy path to growth for app makers by leveraging the 600 million people using Facebook Messenger.
But Facebook may be a competitor to a lot of app makers, all of whom compete for time spent on mobile devices. That's an area Facebook dominates with its flagship app, Instagram, Messenger, WhatsApp, and other apps. But it's always at risk of losing the attention of its users to the next hot thing. By attracting developers to its platform, it receives very detailed data on how users are using apps on Messenger, and can create its own version before an app really takes off.
Cannibalizing its biggest business
The interesting thing about Messenger Platform is that it cannibalizes Facebook's app install ads. Facebook features apps that integrate with Messenger with the messaging app. More importantly, it allows users who receive a message featuring apps content to easily install the app. This makes it easy for an app to go viral through Messenger, which is great for developers. It means they can spend less on promoting their apps.
Currently, Facebook's Messenger Platform is limited to things like photos, videos, and stickers, but the company is reportedly working to attract mobile game developers. And while that could boost the company's payments business in the long run, it will negatively impact its app install ad business. Game developers are some of the biggest spenders on app install ads because their average revenue per install is very predictable.
While cannibalization can be a good thing when it leads to additional revenue, in this case, Facebook is replacing a revenue-generating business with one that returns absolutely nothing to the company's balance sheet. But it does get a lot of data.
Finding the next Instagram
Imagine if Instagram had built its service on top of Messenger. Users could have snapped a photo, added a cool filter, and shared it with their friends through Messenger. Facebook would have seen the meteoric rise of Instagram well before anyone else outside of the photo-sharing app. It could have used that information to build its own version of Instagram (Facebook Camera) earlier, or it could have bought Instagram earlier and saved some money.
This is the risk developers are taking if they build their app on top of Facebook's infrastructure. They're counting on Facebook staying away from the space they're playing in. But Facebook is increasingly a company that will dip its toes in any vertical that grabs the attention of users on mobile, so no app is safe.
Still, with more than 1.4 million apps available in both of the main app stores, it's virtually impossible to create a popular app without getting extremely lucky, or spending lots of money (or both). There are nearly five times as many apps in the Apple App Store today compared to when Instagram launched. For developers looking to gain traction for their apps, Facebook Messenger may present the best option despite the risks.
The impact on investors
Short term, Messenger Platform could actually have a negative impact on Facebook's financial results. If the platform grows popular among developers, it could take away from the amount they spend on app install ads on Facebook's flagship platform. As Facebook rolls out payments on Messenger, it could find a way to integrate its payments information with apps for Messenger to revive its payments platform, and offset any lost revenue from app install ads.
In the long run, however, Facebook is able to combat disruption by gaining granular data on app usage that it previously was unable to access. With so many companies competing for attention, particularly on mobile devices, every incremental minute spent on Facebook is harder to come by. Preventing a new app from blowing up before Facebook can integrate its functionality into its own apps, or buy out the competing app, is invaluable to investors.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.