3 Key Reasons To Build Businesses on Top of Messaging

Last week, we had a passionate discussion at the office around Magic’s business model. For those who aren’t familiar with Magic, it gives you an SMS number with which you can order stuff:

  • Do you want to order a bunch of flowers for your mum?
  • Book a flight ticket from Berlin to Barcelona?
  • Order a pepperoni pizza?

You ask Magic for a quote and if you agree on the price they provide (usually the cost of the order plus some service fee) they will order it for you.

Some people are taking it to the extreme

Magic delivers the service through an army of people who are using online services to make the purchases on your behalf.

Initially, we had two obvious question marks:

a) Is the value proposition strong enough for customers?

b) Will the business scale efficiently enough using people at the back-end?

I became very intrigued about (a) and how powerful messaging can be — I will leave the discussion around (b) for another opportunity.

Messaging as a distribution channel

Messaging apps solve a very basic human need: communication — and that has two key implications:

  • High engagement: It’s not surprising to see that mobile users are already spending a lot of their time in messaging apps. For WhatsApp, the ratio between Daily Active Users (DAU) and Monthly Active Users (MAU) is said to be 70%, which means that, if people use the service, they use it almost daily; for comparison, Facebook has a DAU/MAU ratio of ~50% and Swype, a keyboard app, of +90%.
  • Virality: Messaging services are viral by nature, because they involve the communication among several parties.

Having so much face time with your users, through a service that’s a great channel for word of mouth, means that messaging services are an extremely powerful launchpad for new services. In most of the recent cases of exponential growth (in b2c), we have seen how powerful it is to distribute your services through messaging or social networks:

  • Zynga pioneered using Facebook as a channel to grow extremely fast.
  • Instagram followed and grew massively using the same channel for initial distribution.
  • WhatsApp used your phone number/SMS as a login, making it a very powerful distribution channel
  • Meerkat has been (was?) doing the same through Twitter
  • Dubsmash, a Berlin-based startup for funny videos, has grown to +50m downloads in 12 months by becoming viral on WhatsApp.

In all of those cases, smart entrepreneurs found a way to “hack” an existing messaging service to become a distribution channel, and grow on top of them.

Messaging as a platform: open it to innovate!

Starting a new messaging app is tough because of its very strong network effects:

  • It’s very hard to break the chicken and egg problem: if you don’t have contacts in that messaging app, why would you start using it?
  • But once you have all your friends in one app, it becomes hard for a new entrant to move you there.

So if entrepreneurs want to build services that benefit from messaging, it’s very hard to build them from scratch, without leveraging an existing messaging platform.

Traditionally, the key layers of the internet have been open platforms: think about the web itself, the email protocol, etc. All of them are free and open and that has enabled a vibrant ecosystem.

In the case of messaging, we “have given” such a powerful platform to companies who are keeping tight control over their ecosystem — WhatsApp doesn’t even have an API!

Because most of the ecosystems in messaging are closed, we can only get a sneak peek of how powerful a platform on top of messaging could be:

WeChat

WeChat, the messaging leader in Asia, has been developing its value proposition at a faster pace than its western counterparts and you can see how powerful it can become. Within WeChat, users can order a cab, do mobile commerce, transfer money between users, have access to their bank, etc.

With that approach, WeChat is transforming its messaging app into a gateway to other services. It benefits from the face time with the user to sell other services, which increases the monetization of every active user.

Facebook Messenger & WhatsApp

We have seen how powerful Facebook is in distributing new services, but so far, in the case of Facebook Messenger, we haven’t seen a platform play from them — imagine getting customer service through Facebook Messenger instead of calling call centers…

Facebook recently opened their messaging app to developers, but it mostly focuses on distribution rather than on becoming a platform — i.e. you can’t create multiple logins, distribute messages, etc.

Unless Facebook decides to become more open, it will not be easy to build great services on top of it.

SMS

We could also look at SMS as a platform — almost all telco plans come with SMS packages.

But SMS is quite limited in its ability to provide value-add services on top of it, and it’s so old that it looks like a step backwards when something is built on top of it.

Yet, companies like Twilio are enabling SMS to become smarter. With Twilio, developers can:

a) Register new phone numbers — which is the equivalent of a login user in other messaging networks

b) Send and receive messages from software

c) Programatically trigger actions based on those messages

Thanks to Twilio (among others), we see innovation happening on top of SMS — look how WhatsApp validates new users through two factor authentication!

In summary, so far, most existing messaging services have been quite restrictive to 3rd parties trying to build services on top - arguably they might be concerned about Spam. So far, WeChat seems to be the closer to a platform play and we see how powerful it can be.


UPDATE: <irony> Apparently Telegram read this article </irony>


Messaging as THE user interface (UI)

The value proposition of Magic

Uber has shown how much customers value convenience: removing the friction around payment and ordering is one strong value proposition of the service. Obviously, the lower prices due to its high liquidity also help.

It also helps that users interact with the service through Uber’s mobile app, which is very convenient and efficient.

Magic can provide a similar experience by reducing the friction involved in every online transaction customers make — when you want to buy something online, you first need to search for the right website, choose within the product offering, input your delivery and payment details for the checkout, etc. — quite a painful experience for most mundane online orders.

On top of that, I’m pretty sure that (if it works at scale) retailers would be happy to subsidize the service fee that Magic charges, making it free for the end customer.

But if we compare Magic with Uber, Magic has another unique advantage: the user interface of Magic is messaging, not buttons on an app.

By being one of the most frequently used apps, Magic can be the natural choice for consumers when they want to make a purchase, and that’s game changer. Forget about apps (and obviously forget about the web), messaging could become the door to online ordering — the user interface!

The opportunity at Slack!

But Magic is not alone in the race to become a new UI: let’s talk about Slack!

I’m very bullish about Slack as an open platform in the corporate environment for the following reasons:

  • It is already killing it in terms of user adoption, which provides the volume of users to become attractive for a third party to try to build something on top of it.
  • So far it has had an open mindset in terms of opening their platform to third party developers/plugins — well done!
  • Its initial adoption came from developers, who have the willingness and the skills to build services on top of them.

That’s a big difference compared to what we are seeing on Facebook, WhatsApp et al.

A lot is happening at Slack in terms of platform and UI plays: developers are already building bots to automate tasks through a messaging interface, from birthday reminders to deploying software — in case you want to check it, here is a more exhaustive list and here’s another one.

Checking transportation options with a Slack bot

In summary, messenger services working as channels, platforms and user interfaces are very unique in three key aspects:

  • They have very high face time with the user (addictiveness?) — very high DAU/MAU
  • They have ubiquity — messaging is everywhere, both in mobile and desktop and users use it at anytime
  • They provide a friction-less experience — similar to the way humans communicate

I think Magic can be the pioneer of a new trend of services built through messaging and I’m very much looking forward to seeing what happens with Slack — is there a great opportunity to create Magic for the enterprise?

Do you agree or disagree? I would love to hear your opinion!
Feel free to ping me at @DecodingVC or rodrigo@pointninecap.com