Facebook Finally Ties Up Its Empire

Jon Markman

Facebook ((FB) -Get Report) is making its messaging applications interoperable, and that’s a big deal that finally leverages the promise of the overall platform.

The social media giant announced today that users across Facebook Messenger and Instagram, its popular photo sharing app, will be able to connect, even if they don’t have the other app installed.

Merging the backends of these platforms is the first step to a Facebook operating system, and way bigger profits down the road.

When Facebook began splintering its messaging applications critics warned that the Menlo Park, Calif.-based company had lost focus. It seemed odd to develop three distinct user experiences -- Messenger, Instagram and WhatsApp. Facebook managers clearly had other motives. They wanted to build audiences across different demographics, then eventually welcome them back into the larger platform experience.

The strategy worked. WhatsApp and Messenger have 1.5 billion and 1.3 billion monthly active users respectively. Instagram is close behind, at 1 billion users. According to Hootsuite, a social media management platform, the top five most downloaded apps in January were Messenger, Facebook, WhatsApp, TikTok and Instagram.

Merging the connective tissue in the backend of these services, at this stage in their development, is a masterstroke. Investors should understand the endgame: It is to make the Facebook platform the operating system for most of our connected devices.

That’s a powerful position and detractors will fight valiantly to stop it. They will fail, but let me come back to that.

To get the new functionality users will have to upgrade their Messenger and Instagram mobile apps. The enticement is the new service promises better emojis, the ability to watch videos together across apps and better gesture navigation. For example, the upgraded Instagram experience allows swiping to reply to messages.

Facebook on Tuesday launched a new Accounts Center that lets users manage who can see their messages, in addition to a way to block people and report suspicious requests.

All of the behind the scenes wrangling to bring these features to life started last year when Mark Zuckerberg, chief executive officer, prefaced the interoperability changes as a response to privacy concerns. He promised that all of the services would bring end-to-end encryption, and that messages would not live on Facebook servers indefinitely.

For Facebook, a company not known for online privacy, this seemed like a stretch. In reality, data security always had to be the cornerstone of any plan to build Facebook into an operating system. Merging the messaging experience across all of its properties, these same features are coming to WhatsApp later, is the logical first step.

The next phases are uniform digital payments and ecommerce.

Facebook in June began testing digital payments in Brazil within WhatsApp.

Reuters reported that the company was working with Cielo, Brazil’s largest credit and debit card processor. The free-to-use system will use Facebook Pay, a digital wallet that works across all platform apps.

And Facebook Shops, introduced in May, will help members across Facebook and Instagram create end-to-end ecommerce stores. It’s not hard to imagine how a small business owner might share photos of a new line of dresses on Instagram, then connect it to her Facebook Groups and Shops storefront. Add Facebook Pay and the loop is completed, all within the larger platform.

This is a direct threat to other leading technology platforms like Amazon.com (AMZN), Walmart ((WMT) -Get Report) and even Apple ((AAPL) -Get Report). By leveraging its 2.3 billion monthly active users, Facebook is essentially building an operating system for smart devices.

Against this backdrop Walmart’s scramble to get a piece of TikTok, or Apple’s pandering about user privacy make perfect sense. The business models at these companies are under attack, and Facebook is probably going to win.

An iPhone without the best Instagram/Facebook/WhatsApp experience is like a smart TV that can’t connect to Netflix ((NFLX) -Get Report) or YouTube.

Investors should be buying Facebook on the recent $40 pullback. This is the start of something big.  

Markman publishes the daily newsletter Strategic Advantage focused on stocks at the forefront of the Digital Transformation; click here for free trial. He also publishes the Tactical Options letter focused on directional calls and puts of large stocks.

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