Facebook (NASDAQ:FB) has entered the personal assistant space, announcing testing has begun on “M,” a new digital helper nested in their Messenger app -- what does it say about the company’s plans to monetize Messenger and WhatsApp?
A full transcript follows the video.
Sean O'Reilly: Step aside, Siri. Here comes Facebook, on this tech edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly, joining you here from Fool headquarters in Alexandria, Va. I'm joined today by the formidable Dylan Lewis. How are you today?
Dylan Lewis: I love the adjective change-up there, Sean. That was awesome.
O'Reilly: I'm going to keep rolling with it, man. I bought a thesaurus and I'm just going to keep rolling.
Lewis: That's great.
O'Reilly: Are you excited for pizza day?
Lewis: Very excited for pizza day. It's the best day of the month.
O'Reilly: For those of you that don't know -- and just to make our listeners jealous -- the Fool is a wonderful place to work. Maybe you saw that we were ranked one of the top places to work in America. Once a month, on the last Friday of the month, they give us a giant pizza party. Just like when you're in second grade. Today is the last Friday of the month, and we are so excited.
Lewis: Got to make sure we get the podcast over with before the pizza comes.
O'Reilly: Oh, you're absolutely right. It's 11:00. We've got to hurry. With that, let's dive right in. As I said on my intro, Facebook has some schemes regarding a competitor for Siri. It's called "M."
Lewis: M. Yes.
O'Reilly: M is James Bond's boss in the James Bond series. Is that what they're going for? Are they going to give me secret missions? What's going on here?
Lewis: A lot of the tech outlets had speculated: Is it "M" with Bond; is it Moneypenny?
O'Reilly: Who is M?
Lewis: Facebook said it's just "M" for Messenger, which is so boring.
O'Reilly: Unoriginal and boring. That sounds like something Microsoft (NASDAQ:MSFT) would do.
Lewis: I feel like it's got to be an homage to something. They just don't want to cop to it yet.
O'Reilly: I don't know.
Lewis: They released M for beta tests.
O'Reilly: When you say that, do you mean to 10,000 randomly selected buddies? To Mark Zuckerberg's mom?
Lewis: From what I saw, it was a couple hundred people in the Bay area. Very limited. Basically, M is a personal digital assistant. It's going to be nested inside the Messenger app and it's going to complete tasks, find information for folks, it's going to be powered by artificial intelligence, and there's also going to be a human element of it that will help train and modify to help the system learn.
O'Reilly: How does that compare to what Siri does right now? I am regularly impressed with Siri. I don't use it enough.
Lewis: I think a lot of iPhone users are very frustrated with Siri. I think Siri is great within the iPhone and iOS app.
O'Reilly: And on Wi-Fi.
Lewis: Everything that is native to the device. Everything that Apple controls. If you say, "Remind me to do this later," it syncs up with the reminder app that Apple controls, whereas I think Siri struggles when there's more gray area of what you're searching for.
O'Reilly: More nuance, yeah.
Lewis: There needs to be some context.
O'Reilly: In her defense though, she does know the meaning of life.
Lewis: She does.
O'Reilly: It's to ask questions like that ...
Lewis: Or she'll give you smart-aleck answer.
O'Reilly: Which I also appreciate.
Lewis: In a blog post, Facebook's head of Messaging products, David Marcus, just explained what the product's oriented toward and some of the difference between what's available now in the marketplace. Unlike other AI-based services in the market, M can actually complete tasks on your behalf. It can purchase items, get gifts delivered to your loved ones, book restaurants, travel arrangements, appointments, and way more.
O'Reilly: That is highly interesting. Does that link well with the [Amazon.com (NASDAQ:AMZN)] one-click purchase? That also makes me nervous because there's a security concern there as well.
Lewis: There's that side of things. I think some of what you're seeing within the tech place and what all these different companies are offering -- Amazon also has their own home assistant.
O'Reilly: Yeah. Jeff Bezos isn't going to take this lying down.
Lewis: Their home assistant...
O'Reilly: The Echo, right?
Lewis: Yes. It's very oriented toward helping you make purchases, which aligns with their platform. Siri's is keeping you on the iPhone and integrating the other apps that are available and just having a better operating experience using the phone. Facebook seems to be a monetization effort.
O'Reilly: Wow. They obviously won't charge you. How is that going to work?
Lewis: I don't think they're going to be charging the end user, or if they do it will be hidden within the cost to view something.
O'Reilly: This will align itself to the Facebook payment fee where they might take 1% or something?
Lewis: Like a commission-based type thing. Their comments so far have said that there aren't going to be any charges. They're in beta so they can't do much right now, but that seems to be the clearest way to be monetizing this. You look at the things they're doing -- restaurants, travel plans -- those are the kinds of things that commissions are spent on. It totally makes sense.
O'Reilly: What's going on with Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Now? I see that they're working on something that's more predictive of your habits. Are they trying to win some type of AI search thing? I noticed the Facebook search bar, and they're starting to reach out in the Internet a bit.
Lewis: With all these platforms you have to keep in mind what they're leveraging to get your results for you. Part of what Google is doing now is keeping you on their search platform and keeping you in a place that they can collect data on you.
O'Reilly: So they can sell me more shirts.
Lewis: That's where the magic is. With Facebook M, it sounds like it's going to learn from your interactions and learn from Messenger interactions. The interesting thing about Facebook M is, it will not have access to your Facebook app.
O'Reilly: They did separate it a while ago.
Lewis: Yes. The apps are separate, and I think a lot of people were wondering how they were going to monetize Messenger, and how they were also going to monetize the property WhatsApp they purchased.
O'Reilly: Right. That was my next question. Why are they doing this? Will they finally use it for WhatsApp? What's the deal there? We had many a joke at WhatsApp's expense, or the acquisition's expense.
Lewis: Very pricey. It put a lot of goodwill on the balance sheet for Facebook. I think the clear takeaway when you use moves like this is that this is going to be their best effort to monetize. I don't really know how else they would do it. I don't think people are going to be willing to pay to use a Messaging service, especially one that ...
O'Reilly: There's lots of free ones.
Lewis: There are so many free ones. We joked before the show that if someone messages me on Facebook I might get back to them right away, but if someone texts me I'm going to get back to them right away. We have the luxury of being where there's cellular data and we're not relying on messenger services for our primary communications. The places where people are more reliant on WhatsApp and Facebook Messenger are also not the best places to be monetizing. They need a solution that works for the high-value users that they have. I think this is it right now.
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Moving on, if you're just joining us, I'm here with the awesome, well-respected Dylan Lewis. We also want to provide our listeners with a wearables update. They just had their IPO. We keep making fun of the Apple Watch and the lack of data we have on it. What's going on, Dylan?
Lewis: Q2 Wearables data from IDC -- International Data Corp., one of the world's best known market intelligence firms -- recently dropped on Aug. 27. There's quite a bit to dig into there.
O'Reilly: What are they telling us? Are they giving us more than Apple is?
Lewis: Yes. We're not stuck in this opaque type "oh, there was a big revenue contribution that wasn't 100%" ...
O'Reilly: "But it beat our internal projections."
Lewis: Right, trying to sift through that. IDC is nice enough to give us some hard unit data, which is nice.
O'Reilly: They have internal projections.
Lewis: And they beat them. Perhaps, not surprisingly, the top vendor in the wearables space, Fitbit, is the reigning champ from a year ago. They shipped 4.4 million units, giving them a market share of 24.3%.
O'Reilly: That's pretty sizable.
Lewis: Pretty sizable, but it's actually a drop from where they were a year ago.
O'Reilly: In terms of market share.
Lewis: Yes. They were up 1.7 million from Q2 2014, but they had a market share of 30%.
O'Reilly: A little bit of a drop, yeah.
Lewis: A decent drop, and I think that's mostly attributed to Apple entering the space. You look at what Apple did, and it's nice to have these numbers, as we discussed. Apple has been really vague on what's going on in the Apple Watch line. IDC estimates that Apple Watch came in around 3.6 million for the quarter.
O'Reilly: That is interesting. What did we guess before?
Lewis: The back-of-the-envelope math that we did a couple weeks ago said it was somewhere in the 2.5 million range, or 2.75 million.
O'Reilly: That's a little bit higher. I'm actually starting to wonder if Apple Watch's shipments are actually going to improve. In relation to our CG show that I did with Vincent Shen on Tuesday -- our listeners should check that out if they're curious -- the show was about how Best Buy (NYSE:BBY) was rocking it, believe it or not. The CEO in the conference call really talked up the Apple Watch and noted how he's planning to roll it out to every single store by Christmas this season.
Lewis: For context, Best Buy is going with a store within the store option.
O'Reilly: Right. They've got a little Apple store, and you can go in there and play with them, much like an Apple store. It's much less crowded, fingers crossed. What's going on with Xiaomi?
Lewis: I think the two big winners in the wearables space form this data release are Apple -- just because I think people are surprised by the unit shipment -- and Xiaomi. They posted 3.1 million units in Q2, which is good for third place, and 17% of the global market. Again, they don't have a comp from a year ago because they weren't shipping.
O'Reilly: Garmin (NASDAQ:GRMN) and Samsung are really stinking up the joint.
Lewis: One of the clear losers here is Garmin, which showed 40% growth, which only means 200,000 units. This is a space that experienced over 220% year-over-year growth.
O'Reilly: Right. Garmin is desperately trying to replace their GPS business. I like my Waze app; I don't know about you.
Lewis: Yeah. You look at the success Apple has, and you think this is a great space for big tech to come in. I think they're the biggest loser by far. They posted losses in both market share and shipment volume and slipped to fifth on the list.
Those are the clear losers when you look at the bottom of the list, but I think Fitbit needs to be reasonably worried as well. Those are impressive numbers -- 4.4 million units, up from 1.7 million units, and forward for 160% growth -- but their price point is $50 to $250.
O'Reilly: Right. I was talking with one of our co-workers about multiple friends of mine that I wouldn't expect to be Fitbit aficionados, but they love it. He noted that he was as well, but he'd recommend the $50 one. It takes a watch battery, it lasts six months, the bigger ones have to be recharged all the time, and you can lose steps. You're not going to get rich selling $50 watch-battery things.
Lewis: I think one of the other things that's concerning is, when you look at their price points of $50 to $250, one of the big arguments that I've seen are whether the Fitbit and a premium product like the Apple Watch can coexist. That comes from having two different types of users. You have people that want a really advanced device that can sync up to their smartphone, and you want something that's a bit simpler that you can just wear on your wrist.
The fact that Apple was able to take that much market share out of 350 basis points is pretty damning. I think that's something you have to be worried about. They're not even protected on the low side because Xiaomi is coming in with extremely low-priced products.
O'Reilly: That's what I was going to say when you were talking about Samsung. It's very easy for a big tech company to come in and crush the margins out of everyone because they don't care.
Lewis: It's amazing that they haven't.
O'Reilly: Wait a while.
Lewis: We'll see what happens. I think another thing worth mentioning with this data release is that IDC also does a breakout of what they call smart wearables. These are devices that are capable of installing third-party apps, like the Apple Watch.
O'Reilly: I was going to ask that.
Lewis: We differentiate between something like the Fitbit and the Apple Watch. It comes with the ability to download.
O'Reilly: It comes with two or three uses.
Lewis: Yeah. According to IDC, Apple owns two-thirds of the shipments from wearables.
O'Reilly: I was thinking about how Samsung has a watch, so is that them?
Lewis: It's like Samsung, or Pebble, those kind of products. They're taking a big bite here out of the broader wearables category, but they're also owning the more tech-heavy ones.
O'Reilly: How did the market react to this news? Fitbit had their IPO recently. These numbers will not affect Apple much at all, because they have $200 billion in cash, but what's going on?
Lewis: It was a rough week for tech in general.
O'Reilly: For other reasons.
Lewis: It was rough. We started to see that rally.
O'Reilly: Yeah. Yesterday was crazy.
Lewis: Unfortunately, this news times with the rally.
O'Reilly: So we don't know?
Lewis: What happened was, right when you would expect Fitbit to stabilize with the rest of the market they got hit with this news, and then the stock wound up taking over a 10% drop on the news.
O'Reilly: From the IDC report?
O'Reilly: That's depressing.
Lewis: It's something that I would be worried about. I'm a Fitbit bear. I think they're going to get squeezed at both ends. I think if people want a dedicated device they're going to go with something cheaper that's available from Xiaomi. They're starting to ship internationally and it's a big worry for Fitbit.
O'Reilly: Is there a good case to be made with the -- what appeals to me about Fitbit is the simplicity. I almost feel overwhelmed with an Apple Watch.
Lewis: That's where I worry that a lower-priced product ...
O'Reilly: Like a Samsung.
Lewis: Right. Xiaomi isn't making really advanced devices. They're known as an imitator manufacturer. They're making things that are very similar, very minimalistic, and are dedicated tracking devices for fitness. I think the fitness wearable segment in general reminds me a lot of what we saw with the GPS segment. This is something we've talked about a little in the past. I think you look at what consumers want, and they're OK with having a "good enough" device that has way more functionality than something that's dedicated and has a very limited use case.
O'Reilly: How strong is Fitbit's brand name? That's really the only thing to protect you in the tech world. I can't think of a GPS company that had a better brand name than Garmin. I really can't. Them and TomTom. You had the funny TomTom commercials.
Lewis: You see how they got displaced.
O'Reilly: Yep. It's sad. OK. Well, thank you for your thoughts, Dylan.
Lewis: Always a pleasure, Sean.
O'Reilly: Have a good one.
Lewis: You, too.
O'Reilly: If you are a loyal listener and have questions or comments we would love to hear from you. Just email us at firstname.lastname@example.org. Again, that's email@example.com. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I'm Sean O'Reilly. Thanks for listening, and Fool on!