Facebook – Game on

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Facebook finally moves into games.

• After opening up its Messenger API to third party developers a few months ago, the first game has appeared which could be the beginning of earning a return on messaging and especially WhatsApp.
• The first game is free and is called Doodle Draw which is essentially a messenger based version of Pictionary that is played via the messenger app.
• This is not anything desperately new but it is important as it represents the long awaited move into gaming.
• Facebook has had gaming before, but these were web based games that are now obsolete given that the majority of Facebook’s traffic is on mobile.
• Gaming is the single most important segment of the Digital Life pie taking up 29% of a user’s time on a smartphone and 51% on a tablet.
• LINE in Japan and KakaoTalk in Korea have already shown that there is a significant monetisation opportunity to be had with games via a messaging platform.
• For Facebook, the opportunity is twofold as:
  • First. Becoming a platform, through which games and apps are sold, gives Facebook an opportunity to take a share of the revenue generated by developers.
  • This model is already well established and I don’t think that developers will be shocked by having to share some revenue with Facebook.
  • Second. If Facebook can delight users and get them to spend more of the time they spend playing games within its services then it will have a much greater revenue opportunity.
  • Users spending more time with Facebook means that it will know more about them making the marketing that it sells more valuable and therefore higher priced.
  • Users increasing their time spent within Facebook also increases the opportunity for Facebook to show them marketing.
  • Hence both volume and price of advertising rises giving Facebook a meaningful revenue lift.
• It has long been my opinion that this is by far the best way for Facebook to earn a return from the investments that it has made in instant messaging and WhatsApp in particular.
• Facebook ended up paying $22bn for WhatsApp which to date generates virtually no revenues.
• The good news is that the user base overlap is quite small but earning no revenues from a $22bn investment is certain to lead to a huge goodwill write down unless something changes.
• I think that with time, Facebook intends to overcome WhatsApp’s resistance to operating as part of Facebook and that it will become fully interoperable with Messenger.
• By that time WhatsApp could easily have a 1bn users and Facebook games on Messenger could be much more developed.
• If Facebook can get over these two hurdles, then it could start earning meaningful revenues from gaming and at the same time become a significantly more complete ecosystem.
• This is how, I think that Facebook intends to earn a return on WhatsApp which at the same time could have a meaningful positive impact on revenues.
• However, I still think that this is still quite far in the future and that in the short term there is a risk that Facebook runs out of revenue growth before this new revenue stream can kick in.
• Consequently, I think that Microsoft and Google are safer places to be for now.