Facebook Has Got An Instagram Problem

Mark Zuckerberg dropped a bit of bombshell during the Q4 2017 earnings call. He announced that Facebook daily active users (DAUs) have fallen across some key markets, including the US. COO Sheryl Sandberg elaborated:

“In the US and Canada, these changes contributed to a DAU decline of 700,000 compared to Q3. We don’t see this as an ongoing trend, but we do anticipate that DAU in this region may fluctuate given the relatively high penetration level.”

Facebook attributed the fall to the newsfeed changes it has made to improve the quality of relevance of content users see, and to mitigate against trends such as fake news. While these will certainly have played a role, there is a bigger, more fundamental factor driving the decline: Facebook has an Instagram problem. Or, to be more precise, Facebook has a messaging app problem.

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Messaging apps are the third phase of platforms on which digital audiences congregate. First came websites, then social networks and now messaging apps—which collectively accounted for 7.7 billion monthly active users (MAUs) at the end of 2017, up from 6.6 billion in 2016 and 5.5 billion in 2015. This is a massive segment that continues to grow at pace.

When the sector first started emerging, Facebook could have battened down the hatches and played a defensive hand. Instead, it did what the bravest companies do: it decided to disrupt itself before the competition did. The result: Facebook is now the global leader in the mobile messaging space, with a 2017 global market share of 49%, up from 43% in 2016 and 41% in 2015. It has done such a good job of transitioning its audience that 77% of Facebook’s total audience now use at least one messaging app. But, the problem with messaging apps is that no one has really worked out how to monetise them yet. And that’s a doubly big problem for Facebook because the more time that its users spend on lower monetised messaging apps, the lower the ad revenue yield. So, the more successful that Instagram and WhatsApp become (neither of which are included in Facebook’s active user numbers) the worse off Facebook itself becomes.

Hiking ad rates hides the impact

Right now, Facebook has got enough velocity in its core ad business to absorb the DAU drop. Q4 ad revenue grew by 26% on Q3, only one percentage point less growth than it recorded one year prior. But, until Facebook gets better at monetising its messaging apps, ad revenue will increasingly feel the pinch. This is why Facebook spent much of its earnings call talking about how it is increasing the relevance of advertising, improving targeting and improving user experience, so that it can charge advertisers more. For the midterm, it will hide the impact of the messaging app shift.

Longer-term though, Facebook needs a more robust solution. It cannot rush monetisation of its messaging apps as this will risk alienating users, especially in the more personal environments of WhatsApp and Messenger. Instagram will be the core focus of ad revenue growth, as this has already proven to be a natural home for branding. Facebook is also confident it will be able to build upon its initial base of business users of WhatsApp. All of this will take time though. So, it will need to be complemented with other efforts.

If it looks like a duck

Back in our November 2016 report ‘Facebook The Media Company: If It Looks Like A Duck’, we correctly predicted that Facebook would start to feel the impact of messaging app growth on its core platform. We also predicted that Facebook would start calling itself a media company, but that it would say it was a media company unlike any other. Sure enough, one month later that’s exactly what Zuckerberg did.

There is a serious point to this analyst gloating though; Facebook needs its media company strategy to start paying dividends. It is busy finalising music rights deals and is building up its video arsenal. For music, expect (ad supported) music-based social communication to find a home in messaging apps. For video, expect the messaging apps to start acting as virtual TV programming guides and remote controls for what will likely be a semi-scheduled ad supported and premium video offering. As we said in our 2016 report:

“Media companies beware, there’s a new player in town and it’s betting big, real big.”

This blog post is an excerpt from MIDiA’s forthcoming report ‘Facebook’s Instagram Problem: Building Media Strategy In A Fragmented Audience World’.

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Welcome To The 15 Second Song

Music messaging apps have become something of a boom area in recent years with the likes of MSTY, Dubsmash, PingTune, Flipagram and WordUp pursuing a variety of approaches. It is clear that messaging and music sharing both play to the fundamental human need to connect. What has been less clear is the market opportunity in the context of booming growth among pure play messaging apps like LINE and WhatsApp. The global number of monthly active users of messaging apps is now over 5 billion (which compares to just 2.6 billion for social networks). Messaging platforms are the new place digital audiences congregate. Conscious of the need to add to, rather than compete with, the messaging incumbents, music messaging app Musical.ly has taken a different approach. Instead of creating a soundtrack for messages it has focused on an Instagram-meets-Vine use case, with users creating their own videos to accompany a selection of songs served up by the app. It may seem like a relatively subtle difference but it has created an utterly different use case, one that challenges the very essence of what music consumption actually is, and what a song should be.

Peacocking

I’d been aware of Musical.ly for some time (music messaging apps, along with artist subscription apps, is one of the areas of music innovation that I’m currently paying a lot of attention to). But what really woke me up to the power of Musical.ly was seeing my daughter use it. Within seconds she was creating her first video, finding friends and racking up the likes. In a very similar way to Instagram Musical.ly is a perfect fit for the tweens and early teens. It appeals to the peacocking psychology of kids as they explore and define their identities, and as they learn about friendships and social circles.

musicallyJust as with kids in the school yard competing for who’s got the most Instagram followers, Musical.ly taps this somewhat narcissistic drive to outperform the rest. But while selfies and filters are the language of Instagram for kids, on Musical.ly it is music. Users are presented with a curated selection of tracks to chose from against which they create their own videos, whether they be lip synching, sharp dance routines or creative videos. As a slightly over bearing parent I insisted my daughter did not reveal her face on Musical.ly so she set about creating endless streams of stop motion animation, ranging from her Converse walking themselves across the floor to a biscuit disappearing one nibble at a time, all with a song as the soundtrack. This enforced creativity appears to have paid dividends as she quickly amassed followers and requests to collaborate.

The 15 Second Song

All well and good, but the really interesting bit for me was that each of the songs used in the videos was between 15 and 25 seconds long. Yet she plays the videos back again and again, on loop, as do her followers. So she ends up listening to, for example, 15 seconds of Justin Bieber’s ‘Sorry’ sound tracking her self-propelled Converse many, many more times than she ever listened to the full song. Musical.ly will doubtlessly pitch this to rights owners as ‘discovery’. But it’s not. It is consumption in its own right, and like we’ve never really seen before. The 15 second hook is the song. The other 3 minutes are unnecessary baggage.

Breaking Free Of The 3 Minute Straight Jacket

We have the the 3 minute pop song because that’s what radio wanted, not because that is how long a song should naturally be. So now that we are becoming freed of the constraints of radio schedules, 7 inch vinyl and other analogue formats, there is no reason that the 3 minute straight jacket should dominate anymore. There have long been exceptions, such as Queen’s ‘Bohemian Rhapsody’ (5.55) and Napalm Death’s ‘You Suffer’ (0.01). And although the pop music average remains firmly nailed to 3 minutes, change is a-coming. For example, Canadian Shawn Mendes, now firmly signed to Universal Music’s Island, found his way to fame by releasing 6 second songs on Vine. Generation Edge (i.e. Millennials aged 16 or under) have more apps, entertainment and technology competing for their attention than any previous generation. It’s not so much that their attention spans are shortening, but that they simply cannot afford to focus on any one thing too long else they miss out on everything else.

The changing structure of pop songs to feature hooks throughout, rather than simply in the chorus, means that in many ways pop songs are already becoming a stitched together collection of mini-songs. They inherently lend themselves to being unbundled. Musical.ly and its model of super-short-form music experiences is by no means the entire future of music consumption and creativity, but it absolutely does represent an entirely new strand of both of those.

The Orchard’s co-founder Scott Cohen started suggesting a few years ago that the future of the song could mean embracing 30 seconds as a creative format. It’s beginning to look like Scott may have called it right.

Spotify Just Parked Its Tanks On YouTube’s Lawn

Today’s Spotify announcement was always going to be about Daniel Ek attempting to regain control of the streaming narrative in advance of Apple’s grand entry in a couple of weeks.  But if you were expecting this to be the launch of a bunch of new music features then you were in for a little bit of a shock.  Though there were some new music features outlined (such as swipe to listen, behaviour-learning programming and fitness features) the core of this event was positioning Spotify’s transition from a pure play music service into an entertainment destination with video taking centre stage.  YouTube has been competing (on uneven terms) with Spotify for years as a music service.  Now Spotify is fighting back by going after YouTube’s heartland.

Moving Beyond The Soundtrack

Spotify’s hook line for the event was ‘Soundtracking Your Day’ but in actual fact Spotify want to do much more than that (after all that’s what they already do), now they want to also be a visual part of your day too.  Spotify announced a host of new video partners including native online video producers, next gen video creators like Vice News and traditional brands like Comedy Central.  Spotify is creating a catalogue of video shorts that are designed to fit into your day.  This is unashamedly YouTube, Vessel and Buzz Feed territory.

Lessening The Music Dependence

While music consumption is booming (25 billion hours of music has been streamed on Spotify so far) Ek and co are spreading their bets.  The last 6 months have been tough for Spotify with the major labels casting doubt on its freemium model due to thinly veiled pressure from Apple.  Spotify will quite rightly feel aggrieved with this shift in attitude considering the fact it now accounts for half of global streaming revenue and is doing a better job of driving subscription uptake than anyone has ever come close to doing.  Running a music service can be a high effort, low reward and frustrating experience at times.  So Spotify can be forgiven for wanting to weaken its utter dependence on the whims of a few big labels.

Reversing Into YouTube Territory

Reversing into YouTube and Buzz Feed’s front lawns though will be easier said than done though.  The nature of the mobile consumption landscape is a diverse mix of content capsules, whether they be apps, mobile bookmarks or notification feeds.  Users have learned to consume mobile content in bite-sized chunks.  Facebook has done what it can to re-aggregate content via timeline but has found that asset more useful for sorting users personal content and shared content snippets.  Messaging platforms are now looking like the place where content audiences are best aggregated.  In fact the history of content audience aggregation can be summarised as:

1 – websites

2 – portals (e.g. Yahoo, AOL)

3 – social networks

4 – messaging platforms

Which is why Facebook is disrupting itself with WhatsApp and Facebook Messenger, it knows where things are heading.  This is the environment in which Spotify will be competing, with Snapchat and Line as much as it is with YouTube and Vice.  In Spotify’s favour is the fact that many of the digital first content destinations, Buzz Feed especially, are entirely willing to envisage a future in which their content could exist entirely on third party platforms.

Return Of The Portal?

In a lot of ways Spotify’s video mini-pivot feels like a back-to-the-future spin on the 20th century portal model but there is clearly an opportunity to re-aggregate our fragmented digital entertainment lives.  Whether Spotify can do that or not is another question and even if it can, it will be a long-term play rather than some short term hit.  Ek might have said he wants to ‘soundtrack our day’ but his product strategy actions show us that he feels Spotify has outgrown being the soundtrack alone.