Why Facebook Wants To Separate Messaging From Its Mobile App

by Trefis Team
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Facebook (NASDAQ:FB) will soon discontinue the messaging feature of its main app, and its users will need a separate app in order to communicate with friends via direct messages. While the move may seem odd and an unnecessary complication, it is aimed at capturing mobile messaging market where Facebook traditionally hasn’t seen much adoption. The move comes following its acquisition of Whatsapp, the largest mobile messaging service in the world in terms of active users. As the company has allowed Whatsapp to operate independently as of now, it needs to ensure that Facebook brand doesn’t fade away from mobile messaging market. There may be some user backlash in the beginning, but the decision is focused on reaping long-term benefits.

Our current price estimate for the company stands at $45, implying a discount of about 25% to the market price.

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Mobile Usage Is Growing, Emerging Markets Will Fuel The Next Wave Of Growth

Global smartphone shipments are on the rise and totaled roughly 968 million for 2013. Smartphone sales jumped 36% in Q4 2013 and constituted roughly 57.6% of total mobile phone sales as compared to 44% during the same period a year ago. [1] Developing economies including Latin America, the Middle East and Africa, Asia-Pacific and Eastern Europe saw their smartphones sales surge by over 50% during the fourth quarter, contributing most to the global growth. [1] IDC forecasts smartphone shipments to grow to 2.3 billion by 2017 and, as we saw in the fourth quarter of 2013, much of this growth will come from emerging markets.

Emerging countries include over 85% of the world population, and contribute almost three quarters of global GDP growth, according to Fidelity Investment Ltd. [2] Unlike developed countries where smartphone penetration is above 50%, it is below 25% in many developing countries. While the majority of the population in these countries are below the poverty line, the elite and aspiring middle class make up nearly 20% of the population. However, as economic development gains traction in these countries, many households are expected to move to the higher income bracket in the future, increasing the demand for smartphones. While the adoption of smartphones in developed countries fueled the first wave of global growth, strong demand in emerging markets, especially Brazil, Russia, India and China (BRIC), will drive the next phase.

Growth In Mobile Usage Warrants Strong Mobile Messaging Service

As smartphone usage continues to grow, mobile Internet messaging will gradually replace SMS texts and will become an indispensable service. Facebook Messenger hasn’t seen much success and the company believes that separating messaging feature from the main app will essential force users to use its messaging app. We believe that mobile messaging is here to stay, even though the growth in social networking industry might slow down. This is because mobile messaging enables a very basic human need to communicate with family and friends day-to-day in a convenient manner. In some ways, Facebook has acknowledged a weakness in its business as it looks into the future and is attempting to plug the gap  by strengthening its position in mobile messaging market. Whatsapp’s acquisition was another move in this regard. The company’s multi-app strategy is aimed at capturing different niches of mobile market, thereby opening up new growth opportunities and reducing risk.

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Notes:
  1. Gartner Says Annual Smartphone Sales Surpassed Sales of Feature Phones for the First Time in 2013, Gartner, Feb 13 2014 [] []
  2. Emerging markets insight []
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