Last night on Facebook's (NASDAQ: FB) third-quarter earnings call, CEO Mark Zuckerberg laid out where the social networking giant's future lies: video, messaging, and Stories. Messaging in particular is extremely important to Facebook, as its two primary messaging platforms, Messenger and WhatsApp, both have well over 1 billion monthly active users (MAUs). At last count, Messenger had 1.3 billion MAUs while WhatsApp has more than 1.5 billion MAUs.
Put another way, two out of Facebook's four billion-user platforms are messaging services. Facebook is now tasked with trying to monetize all those users. Somewhat unexpectedly, Apple (NASDAQ: AAPL) has emerged as a major obstacle to Facebook's growth aspirations.
Apple Business Chat (left) vs. Facebook Messenger for Business (right). Image sources: Apple and Facebook.
Apple is Facebook's "biggest competitor by far" in messaging
It's common courtesy to avoid mentioning a rival by name whenever possible on earnings calls, but Zuck had no qualms directly naming Apple as Facebook's "biggest competitor" in the messaging space:
We are leading in most countries, but our biggest competitor by far is iMessage. And in important countries like the U.S., where the iPhone is strong, Apple bundles iMessage as the default texting app and is still ahead. In countries where there's more competition between iOS and Android like much of Europe, people tend to prefer our services. Now, it's worth noting that one of the main reasons people prefer our services -- especially WhatsApp -- is because of its stronger record on privacy.
Zuck's comment on privacy is a bit hollow considering the company's recent scandals. Furthermore, despite now publicly espousing the privacy benefits of encryption, Facebook executives had reportedly pressured WhatsApp in private to weaken its encryption in an effort to strengthen its data collection capabilities. That clash ultimately culminated in Jan Koum's resignation as WhatsApp CEO this year. Messenger has never been encrypted by default, although it is an option that can be manually activated. Facebook is also starting to ramp up ads within Messenger.
In contrast, Apple has positioned itself as a champion of user privacy in recent years, never missing an opportunity to note that all iMessage conversations are encrypted. iMessage was initially launched back in 2012, offering users an integrated alternative to traditional SMS text messaging that was more secure, and Apple has made the service into a legitimate platform in recent years, adding features like payments, stickers, and app extensions. Apple even launched Business Chat last year, directly threatening Facebook's best hopes of monetizing its messaging services.
Even if iMessage and WhatsApp are technically comparable in terms of encryption and security, Apple has staked much of its brand on privacy, while Facebook proves time and time again that it can't be trusted with user data.
Looking outside the U.S.
Facebook has never provided geographical breakdowns of its Messenger or WhatsApp user bases, although it's widely accepted that WhatsApp is incredibly popular in many emerging markets. Zuck's comments are the most direct confirmation yet that neither of Facebook's messaging services are dominant in the important U.S. market, where the company enjoys the strongest monetization.
Conversely, that also means you can look at Apple's position in some geographical smartphone markets to gauge Facebook's relative strength or weakness in messaging. While Apple is strong in the U.S., the good news for Facebook is that just about every other smartphone market on Earth has "more competition between iOS and Android," so it still has some opportunities in messaging yet.
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Evan Niu, CFA owns shares of Apple and Facebook. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short November 2018 $155 calls on Facebook, and long November 2018 $135 puts on Facebook. The Motley Fool has a disclosure policy.