Can Google’s “Allo” Prove To Be A Threat To Facebook?

Facebook (NASDAQ:FB), has been increasing its focus on its “Messenger” app this year, looking to make it the “go to” app for its more than one billion active users. Its mobile messaging app “Whatsapp” has also seen significant growth in number of users and we believe both these products will be key revenue drivers for the company in the long term. However, competition in the messaging segment intensified after Google launched its “Allo” messaging app, which uses artificial intelligence to provide smart answers and suggests replies to conversations. The latest messenger by Google also has a built in “assistant” to help during conversations, differentiating it from Facebook’s messaging apps. While this feature impacts the privacy of messages (which are stored on Google’s servers) and Google allows encryption only in an incognito mode, it leads to easier access for information and more convenience during chats. However, Google’s past experience in social media has not been very encouraging and Allo is a new entrant in the space dominated by Facebook with its huge user base. While Allo’s “intelligent” features are compelling, privacy concerns can impact usage. In addition, users already familiar with Whatsapp and Facebook’s Messenger might be reluctant to move into another app. Google’s ability to use technology to create a differentiated app which can offer advanced features without compromising on privacy will be key to lure users away from Facebook’s messaging apps.

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Huge User Base Works To The Advantage Of Facebook

Facebook’s messaging apps have more than a billion monthly active users.  This large user base will work to its advantage as competition intensifies in this segment. Allo is a new entrant and has not seen much traction yet. Its intelligent features and the integrated “assistant” are an advantage and if Google integrates this app with its ecosystem (Gmail, Google Maps) it could potentially become a go-to messaging app for users heavily reliant on Google.  We believe that Facebook and Google are working towards making their platforms a “one stop shop” for all online needs of users, integrating their apps such that users don’t need to leave their platform for any activity. In choosing one platform over the other, compelling features and data security will be the key differentiators.  However, Facebook has the advantage of being extremely popular and can leverage the familiarity of its apps to gain users.  The company must maintain constant innovation to keep its products in line with competition.  This will ensure that the company retains and grows users.

According to our estimates, Whatsapp and Instagram account for more than 20% of Facebook’s valuation.  As the company looks to monetize Whatsapp, we expect its average revenue per user from this app to increase from an insignificant number in 2016 to nearly $6 by the end of our forecast period.

Whatsapp’s stellar user growth and engagement will the key drivers of these revenues. After hitting the 500 million mark 2014, Whatsapp crossed 1 billion users in January 2016, indicating a very rapid pace of expansion. Engagement levels on the messaging platform are also high, with about 30 billion messages being exchanged every day on the app.

While Google’s “Allo” appears to be a “smart” app with a potential of integrating other apps on the company’s ecosystem, its engagement levels are currently low. If Facebook is able to continue its innovation and make its messaging apps “smarter”, the company can leverage its huge user base and gain a competitive edge over Google’s “Allo”.

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