- Apple’s upcoming iMessage update creates competitive headwinds for Facebook and Snapchat.
- Apple is also rumored to launch a photo/video editing app that integrates with social networks.
- The degree to which it impacts Facebook and Snapchat fundamentals is benign.
I’m not here to drag investors into a spiral of negativity when pertaining to Facebook, Inc. (NASDAQ:FB), but there’s an increasing probability that Facebook’s messenger service will face competition from Apple in the coming months. Since Apple, Inc.'s (NASDAQ:AAPL) messaging service is due for a major upgrade in the next iOS update, the features overlap with the other messenger services (Snapchat and FB Messenger).
Since the impending reality of heightened competition should be looming over the heads of investors, I wanted to write an article offering greater clarity. If the rumor mill is correct, there’s a heightened possibility of Apple encroaching into some of the social verticals that both Facebook and Snapchat currently dominate.
iMessage features overlap and build upon competitors
Apple increased the size of emoji’s, which doesn’t sound like a significant update, but the size of the emoji is roughly comparable to Snapchat emoji’s, hence the recent trend in iMessage has been to rip and implement successful feature additions on competing social platforms. However, there were new evolutionary steps with iMessage that makes usage easier, as certain words or phrases can be converted into the relevant emoji upon the click of a button. So, if you happen to be talking about getting some pizza, or catching a movie, those key phrases can be converted into the visual emoji equivalent.
Apple also brought in features from the Apple Watch wherein a user can draw visual sketches and send them via iMessage. The haptic feedback may not be present on an iPhone, but the ability to send more elaborate messages, which may include pictures with text phrases on top, or the ability to send GIFs via an online store all reek of Snapchat or FB Messenger. Furthermore, Apple opened up iMessage to third-party developers so other apps can run via iMessage, which creates another ecosystem on top of iMessage that didn’t exist prior to the impending iOS update.
Apple also introduced new animations that can be sent with birthday messages, celebratory messages, wherein the chat window will explode with fireworks or birthday balloons.
Apple took ideas, but they also built upon the messaging experience with better features.
How does this bode for Facebook and Snapchat?
While these feature additions make significant strides to improve the overall user experience, there are limitations to the reach/penetration of iMessage when compared to competing social apps. In other words, unless both the recipient and sender own an iOS compatible device, the additional features don’t really apply.
The current Apple iPhone installed base is appx. 560 million to 580 million, according to Bank of America Merrill Lynch. As such, the potential encroachment of Apple iMessage is limited to these current iPhone/iPad users. Since the vast majority of the smartphone world is attached to an Android handset, there are limitations to how this may affect both Snapchat and Facebook investors on a go-forward basis.
However, if Apple were to open iMessage to competing platforms… oh Houston, we have a serious problem! That being the case, Apple’s recent unveiling and overall commitment to make iOS a walled off garden from Android and Windows helps to diminish this potential risk.
Furthermore, the value of a social network is defined by its “network effect.” In this regard, both Facebook and Snapchat have substantial advantages. Facebook’s user base is unassailable on both Messenger and the core platform, whereas Snapchat is the social platform of choice among the millennial demographic. Facebook Messenger logged 1 billion users as of July 2016. Snapchat was reported to have 150 million active users, according to internal sources from Bloomberg.
However, the differentiation of standard text messaging to be more messenger-like can translate into a diminished usage of both FB Messenger and Snapchat. As such, the risk of direct competition is low, but usage metrics for FB Messenger and Snapchat could be negatively affected.
Facebook Messenger’s payment services and chat bot contribute an infinitesimally small amount to FB’s core revenue.
Snapchat has continued the roll out of advertising units in the story feed. According to Re/Code, Snapchat is on track to generate $300 million to $350 million in revenue in FY’16. However, the stock isn’t even publicly traded, so the risk is mostly isolated to early-stage venture investors.
The iMessage update doesn’t do much to alter Facebook’s core fundamentals, nor does it affect an audience of retail investors with regards to Snapchat. Perhaps, Snapchat’s revenue target won’t be met, but that’s an issue for another day when Snapchat actually IPOs, which is speculated to happen in 2017.
We’ve been hearing rumors of a Snapchat IPO for quite a while without any real confirmation from investment banks. If Snapchat were to IPO, a substantial deal to the tune of $20 billion would be leaked to the press, as it would involve a consortium of banks to pitch the deal to a pool of institutional investors.
Apple could be working on an Instagram killer
In other news, it was reported by Bloomberg that Apple will release a social application that’s eerily similar to Instagram.
Here’s the direct quote from the news report:
Now Apple is starting to develop a video sharing app that allows users to record video, apply filters and drawings to the media -- much like Snapchat does -- and send it to contacts or via existing social networks such as Twitter Inc., according to the people familiar with its development. The software is currently being designed to be used mostly with one hand and with the intention that video could be shot, edited, and uploaded in less than 1 minute, the people said.
That being the case, the app isn’t a direct replacement to Instagram either. It creates a more streamlined process for iPhone users to post pictures/videos in a more acceptable format for the pre-existing ecosystem of social applications. In other words, Apple might be moving further up the value chain with regards to social apps, but it doesn’t intend to directly compete either. It’s hard to imagine how Apple will directly monetize this new feature other than offering it as a means of wooing smartphone users from competing vendors.
I’m starting to view an Apple versus Facebook & Snapchat dynamic to be less of a threat than originally thought. As an app ecosystem provider, Apple needs to provide services that either accompany or simplify the process of using applications but limit direct competition with app vendors.
Apple may have broken this rule with the launch of Apple Music, but given its extensive presence in the music ecosystem via iTunes – it was only a matter of time before Apple offered a streaming equivalent.
In other words, the rational for competing more actively in music and video is driven by Apple’s pre-existing presence in both of those verticals whereas Apple’s efforts in social are limited in scope and scale.
The enhancements to publishing videos and photos on user timelines may have a net positive impact on social platforms, whereas Apple iMessage could diminish usage of messenger apps on iOS.
I continue to reiterate my buy recommendation on Apple stock, and a high conviction buy recommendation for Facebook stock.