Is Facebook's Slingshot App A Long Shot?

  • Facebook attempts to take on Snapchat with Slingshot, Facebook has failed to create a killer-application in the past.
  • Monetizing a messenger application is complicated, and companies who have created a business model out of it have difficulty with improving pricing, and ad-engagement.
  • Assuming Facebook does succeed the incremental addition to revenue and net income isn’t likely to be very meaningful.

Is Facebooks Sligshot App a Long Shot

Facebook (NASDAQ:FB) continues to unbundle the big blue application, through the launch of Slingshot. The application will replicate Snapchat in many ways, and helps to explain why Mark Zuckerberg walked away from Snapchat after offering $3 billion. After all, the company has limited resources to continue buying out companies, and it’s not always necessary for the giant to acquire companies.

Facebook's initial attempt at internally developed 'Poke' app

Here’s what’s funny, Mark Zuckerberg met with Evan Spiegel (founder of Snap Chat) and told Evan of this application they were creating called “Poke.” The application was supposed to be a Snap Chat killer, but it quickly fizzled from the number one spot on the Apple application store. Eventually Facebook removed the application from the Apple application store due to the lack of popularity.

Back in December of 2012, a Business Insider story summarized Facebook’s Poke app failure:

It's about how Facebook blatantly ripped-off a hot startup – bragged about it – and then fell on its face, to a chorus of alarmed wonderment from around the industry. Facebook pushed distribution of Poke through its already massive installed Facebook iOS app, and Poke quickly shot to number one in Apple's iTunes App Store. At this point, Facebook PR seemed to hang up a "Mission Accomplished" banner of sorts in the press.

Poke started dropping in the iTunes rankings. It sank to 34th. Then to 39. Now it's down to 50. Snapchat, meanwhile, remains the third most popular app in the store. And now, instead of writing stories about how Snapchat is doomed, people are wondering: What's wrong with product development at Facebook?

Facebook's Slingshot Application

The new slingshot application is somewhat similar to Snapchat. Basically, you take a picture, and send it to a group of friends. Upon receiving the photo, you have to respond back; otherwise you won’t get to see the photo. After opening the photo, you get to see what your friend is up to. However, as soon as you open another photo, the photo you just opened disappears.

The application is pretty unique in that it forces social engagement. On the downside, the application may never gain momentum, and could quickly turn into a dud. Remember, Snapchat didn’t really gain that much steam, until several months after the application launched. This indicates that determining whether the application is a winner or a loser is going to take quite a while.

Even so, the odds are stacked up against Facebook. There are tons of applications, and it begs the question whether another messenger application is even remotely necessary.

However, let’s assume this application does become a huge hit, where does monetization come into play? Currently, Snapchat doesn’t monetize its application very effectively, and it’s currently the most popular application for sending discrete messages to friends and family.

The CEO of Snapchat, Evan Spiegel discusses monetization in an interview with Forbes:

Asia offers a possible blueprint. There, a handful of wildly popular mobile messaging services that upsell users with “in-app” purchases. Spiegel’s party line, when discussing revenue, feels as if it’s read from a script: “In-app transactions followed by advertising, that’s the plan we’re sticking to.

Basically, Snapchat will offer premium application features, and ad-sales. The problem that seems to plague the company is that advertising on the application will be awkward at best, and it would most likely have to integrate with another ad-network to be effective at all. After-all, brands wouldn’t want to buy ad-placement from Snapchat specifically, but may want to launch a similar ad across multiple applications at the same time.

Therefore, Facebook has to overcome two hurdles with Slingshot. First is has to gain traction with a large user base, and while the application itself looks fun – many applications never reach the top 50, much less the top 100.

However, assuming the application is sticky enough to go viral and attract millions of active monthly users. Facebook will then have to figure out a way to advertise. The cost per impression on mobile applications is significantly lower than desktop, so it will need to offer a premium feature package, or attempt to sell something within the application. This is extremely complicated as mobile applications tend to be extremely specialized.

Upon monetization, the valuation will detach from user-metrics, to sales and net income ratios. This is why mobile application founders are hesitant to monetize, as it quickly clarifies to investors the value of the product from more of a financial context. Crossing this bridge comes with many complications, and in many instances a great product that doesn’t generate much in revenue deflates investor sentiment.

Conclusion

Facebook's Slingshot has a lot of competition amongst competing mobile messenger applications. We have seen Facebook develop applications similar to Snapchat that have not attracted much of a following. Therefore, investors shouldn’t have very high expectations for the new application.

Furthermore, assuming Slingshot does in fact become a successful application, monetization of the application won’t result in much in terms of sales and net income. After all, the ad-format for messenger applications doesn’t lead to very high engagement in terms of click through. Therefore, the Slingshot application may add very little incremental revenue and net income.

Despite, all the negatives, it’s nice to see Facebook develop a product internally. After all, Facebook doesn’t always need to dilute shareholders with massive acquisitions that may or may not workout.

Amigobulls has a hold rating on FB stock. See complete Facebook stock analysis.

To see Facebook’s latest stock price movement, click here (NASDAQ:FB)

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