Facebook Inc.’s plan for a new cryptocurrency has the potential to change entire industries. A more likely outcome is that the technology transforms the social media giant’s own business.
While Facebook makes most of its revenue from advertising, Chief Executive Officer Mark Zuckerberg says the future is private messaging. That’s a tough venue for data-hungry digital ads, so Wall Street has been wondering how the company will make money from this new future. Libra, the crypto coin Facebook announced last week, provides a tantalizing answer.
“Libra could introduce a meaningful new product and profit stream for Facebook over the coming years,” Citigroup analyst Mark May wrote in a recent research note titled “Facebook’s Path to Printing Even More Money.”
Facebook has more than 1.5 billion users on both WhatsApp and Messenger yet makes almost no money from the messaging services. Last week, when Facebook revealed its Libra plans, the company also said it would soon put new digital wallets inside these apps so users can easily use the cryptocurrency to send money to friends and businesses anywhere in the world. If the plan works, WhatsApp and Messenger will become new payments and commerce hubs that take small-but-profitable cuts from billions of transactions, according to May and other analysts.
“This move is a strong indicator of Facebook’s intent to become a transactional platform (through Messenger and WhatsApp), expanding well beyond its massive advertising business,” wrote SunTrust Robinson Humphrey analyst Youssef Squali.
Facebook has a checkered record in payments, and Libra has been poo-poohed by some crypto purists. But China’s WeChat and QQ show what’s possible when messaging apps cleverly fold payments and other services into the mix. WeChat and QQ make money by facilitating payments between users and merchants, distributing mobile games, and selling digital goods, such as stickers and avatars. The services have turned owner Tencent Holdings Ltd. into the most valuable publicly traded company in China.
Facebook’s crypto push could facilitate similar offerings in payments, shopping, apps and gaming, while tapping into the company’s huge user base in Asia, where it has nearly four times as many monthly active users as it does in North America, according to RBC Capital Markets analyst Mark Mahaney. Libra “may prove to be one of the most important initiatives in the history of the company to unlock new engagement and revenue streams,” he wrote in a recent note.
For now, Facebook and its new subsidiary Calibra, which is building the digital wallets, are framing the new currency as a way for individuals to send money to each other across borders. David Marcus, who is leading Facebook’s Libra efforts, said that the company doesn’t plan to take a fee when people send money to friends, and will likely charge “tiny transaction fees” for payments to businesses.
That could be the first step toward something more lucrative. Before Facebook, Marcus was president of PayPal Holdings Inc., the largest independent digital payments business in the U.S. PayPal facilitates one-to-one payments, but it has become a common way to pay for online purchases, too.
“You usually don’t make money off of [peer-to-peer] payments,” Harshita Rawat, an analyst at Sanford C. Bernstein. “The actual use case is getting people into the habit of doing financial transactions on the platform, and then start to roll out other e-commerce related activity.” Once users get comfortable sending money through an app, adding a marketplace feature and more interactions with businesses often follow. That is “where the real monetization opportunity is,” she added.
Marcus can see a future in which Facebook turns payments and digital wallets into a new business — even if he’s not exactly sure what that will look like.
“Over time, if we build more services on top of Libra, we’re probably going to likely index on other sources of income,” he said. “That’s future talk. We’re not going to do that for the first few years of this ecosystem because we want to focus on adoption.”
Whether or not Facebook gets that adoption is the more pressing challenge. The company’s crypto plans are already under fire from regulators in Washington and Europe who don’t like the idea of Facebook dipping its toe in yet another aspect of people’s personal lives. And gaining consumer trust after years of privacy mishaps may be harder than Facebook expects. Bernstein’s Rawat describes Libra as “somewhat of a moonshot project.”
If people do start stuffing their new digital wallets with Libra, it might not take years for Facebook to turn that activity into revenue. Marcus believes the new wallets could have a more immediate financial impact on a business line Facebook knows well: Targeted advertising. If users have Libra on hand as they scroll through Facebook’s News Feed, when they click on an ad it will be easier to buy something. That would make Facebook ads more appealing to marketers.
“If there is more commerce happening on the platform, then small businesses will end up spending more and advertising will be more effective for them,” he said.