TECHNOLOGY

Snap Is Dead in the Water Because of Facebook

Evan Spiegel, maybe it’s time to start bailing water?

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BY Sonya Mann - 11 Aug 2017

PHOTO CREDIT: Getty Images

Snap Inc., maker of Snapchat and not much else, released its second-quarter earnings results on Thursday. The numbers were abysmal, missing guidance on both user growth and revenue, and Wall Street reacted immediately by tanking the stock (not unlike what happened in response to Snap's first-quarter earnings). It really does seem like Facebook's feature-copying, in the form of Instagram Stories, sapped Snap's momentum, and the smaller company can't seem to pull out of the nosedive.

Snapchat's DAUs add up to just 173 million, two million less than the company predicted, and user growth is significantly slowing. Snap has been pitching itself as a camera company for a while now, but realistically it's a social media company. Unfortunately for Snap, social media companies are valued based on user growth until they start bringing in serious revenue. Spoiler alert: Snap isn't doing that either. Consequently the company's share price fell from $13.70 to $11.51 after hours, and $11.51 may not be the floor.

On the earnings call CEO Evan Spiegel emphasized user engagement, touting the stat that daily active users each create 20 snaps per day on average. When he called the company's dancing hot dog animation "the world's first augmented reality superstar," the sound of eyebrows raising was almost audible on the conference call line. Spiegel said, "We are still in the very early stages," explaining that Snap will continue to develop its self-serve and programmatic options for advertisers. CSO Imran Khan emphasized the effectiveness of Snap ads, discussing several campaigns that delivered results for brands.

Here's the problem: Modest improvement is not good enough to sustain a public company with an advertising business model that hemorrhages money in operating expenses and isn't growing enough to justify the expense. Snap existentially needs to attract more advertisers, which can only be achieved by cultivating a large enough user base to rival Instagram and Facebook. It appears that Facebook's imitation effectively demolished Snapchat's user growth, and the market won't stand for that.

Why is growth so important? It's important to realize that advertisers, especially big ones, are less constrained by budget than they are by opportunity cost. You can theoretically split any amount of money between a handful of platforms, but time and expertise are needed to make that money produce a compelling return on investment.

Advertisers need media material appropriate for each context, since different social media services have different cultures and designs. Ongoing ad campaigns need to be monitored and managed. There's a learning curve for producing results from each platform, and increasingly it makes the most sense to pump more money into Facebook's various properties, perhaps with a side of Google AdWords. The expense of devoting resources to a smaller platform doesn't make sense.

Can Snap survive? Sure. It needs an inimitable product innovation, or entirely new product, that will bring users flocking to its services. Otherwise, Snap needs a new business model.