If Only Snapchat Could Filter Their Q3 Earnings Report
Looks like Snap Inc., the parent company of Snapchat, could use a real-life ‘pretty filter’ for its business this past week. The blurring, perfecting and other fancy effects Snapchat filters are known for would’ve done wonders for the reality of Snap’s third quarter earnings report, released last Tuesday. It might’ve avoided the stock sinkhole that soon followed, exacerbating the loss of wealth Snap’s spry, young founders are already experiencing.
But how did this happen? A full year has yet to pass since Snap Inc. was in the news touting another Facebook like, social media Cinderella story on the Snapchat IPO date of March 2, 2016. Their venture into the product foray had yet to show its lack of revenue potential (to date it shows an estimated $40 million loss due to unsold merchandise) and their plan to grow their advertising revenue seemed just as good as any.
In an exclusive interview with CMS-Connected, John Colley, Professor of Practice, Pro Dean at Warwick Business School at The University of Warwick, gave us his thoughts on why Snap Inc. is on shaky ground, some insight into their struggles against Facebook, and what likely motivated Tencent to take on a 12% stake in the company.
Snapchat Stock is Down in More Ways Than One
“Snap Inc, owners of Snapchat, the video messaging app, have just recorded their third quarter of disappointing user and revenue growth figures since the IPO. The shares have collapsed amid concern that Snap will be another Twitter, LinkedIn or Yahoo which have failed to monetise their user bases. Cash burn of investors’ money is enormous and Snap have announced that they will have to overhaul their messaging app to make it easier to use. They accept there is likely to be further disruption as a consequence. Facebook and Google together have almost 60% of global digital advertising revenue, by comparison Snapchat has 0.5%.
Evan Spiegel, Snap’s CEO, became one of the youngest billionaires at the IPO but has since found life much harder as Wall Street criticism intensifies. China’s Tencent has just taken a 12% stake in Snap Inc. paying $2Bn through opportunistic buying as the shares collapsed. Tencent runs a messaging app WeChat in China as well as online gaming and has a valuation of around $470Bn.” says Colley.
He goes on to say: “Markets have also been irritated by Snap’s founder shares which have all the voting rights and are designed to keep the founders in position however ineffective they may be at running a growing business. New investors at the IPO did not receive any voting rights reducing their ability to influence management. In the case of Google, Facebook, and Amazon the founders have brought in capable experienced management who can run rapidly growing businesses. In the case of Snap this is much less clear. The recent debacle involving the write off of $40Mn of video-camera spectacles does not look good. Nor does the announcement to overhaul the app as it could be easier to use.”
Could a Snapchat Redesign Really Save It?
The announcement for a redesign of the app has a few eyebrows raised. Its main prerogative is said to streamline the chat feature and make the app easier to use, making it more appealing for an older demographic. That’s all well and good if that demographic they are hoping for will bring a substantial amount of advertising revenue with them. As John Colley pointed out, a major failure of Snap has been the inability to monetize its user base.
In my opinion, a redesign might save it if that alone were the focus of any changes to the platform. Slightly longer videos might make content engaging enough to gain new users or at the very least, stop the bleeding of users leaving in favor of Instagram Stories. They could make the user experience friendlier to influencer’s using Snapchat for revenue, perhaps attracting more users that way as well. Along those same lines, they could allow users to share their Snapchat posts on other social media platforms similar to how Instagram allows sharing on Facebook and Twitter. They could even follow the lead of other social media platforms who are getting into the eCommerce market by offering themselves up as a position in the customer journey, similar to the relationship between RewardStyle and Instagram.
We all know it is no coincidence I mentioned the Facebook-owned platform, Instagram, a few times in my previous paragraph. It’s well known that Snapchat features are getting quickly snatched up by Facebook for Instagram, and sometimes even improved upon, yet Snapchat hasn’t quite caught up in emulating what makes that platform so successful. Snap’s CEO, Evan Spiegel, has even claimed this is not playing fair but as John Colley pointed out in a recent article: “The firm has tried to explain poor performance since it floated its shares by complaining that Facebook is copying everything it does – hardly unusual behavior in competitive markets.”
Why Snapchat Will Never Catch Facebook
Some think Snapchat was always destined to wallow in the shadow of Facebook, and in hindsight, they wouldn’t be entirely wrong. In the eyes of the stock market, Facebook is likely the yard stick for which all public social media companies will be measured but here, John Colley gave CMS-Connected some fantastic insight as to why Facebook is consistently taking the wind out of Snap’s sails:
“Snapchat is paying the price of being second mover to Facebook in social media markets where network effects are strong. In short, in social media more users attract still more users as the value of the app increases with each additional user added. The more people on the same app the greater the value to each.
The value of being the first mover in a market is only sustainable if followers can be deterred or disadvantaged. First movers employ an array of methods to slow the progress of competitors. First of all pre-emption of the market means that if users are happy with the service received they have little reason to try elsewhere provided a better offering does not turn up. Hence Facebook are rapidly copying any new features on Snapchat to ensure the follower does not have a better offering. There is always some inertia with users or customers which prevents them moving too readily.
Secondly create switching costs for customers to make it hard to move elsewhere. In many industries this means contracts over time, loyalty schemes, high branding, or distinctive differentiation. In social media the biggest switching costs are network effects which mean a competing app probably does not have as many of the people on it as you would wish to message. However downloading an app and setting up is not hard.
Other methods include patents which are very effective in pharmaceuticals and can work in technology markets but rather less so in social media. Secrecy around new technical capabilities and features can also slow competitors’ progress in being able to copy.
Snapchat have taken on Goliath in the form of Facebook who have the benefit of pre-emption of the market, switching costs and network effects. Facebook’s job is to ensure followers cannot develop. Hence Facebook’s ownership of WhatsApp, an encrypted on line messaging app, which has an enormous user base and does not attempt to generate revenue through digital advertising. In effect Facebook are blocking off market space to prevent followers who might then attract digital advertising.”
Tencent, Owner of WeChat, Joins In
The day after Snap’s Q3 earnings report was released, it was announced that Chinese investment behemoth Tencent Holdings Ltd, the owner of WeChat, had purchased a 12% stake in the company. Some wondered if this marked the first signs of an eventual sale of Snapchat to Tencent but it doesn’t look likely. John Colley let us know why it seems to be driven more by an attempt to understand the Western market than an eventual total ownership:
“The investment by China’s Tencent is interesting as they will almost certainly not be allowed to own social media in the USA. However they may be able to provide experienced management, knowledge and technology sharing. In return they receive insight, knowledge and influence into the US and other markets. Evan Spiegel may realise he would be better off acting as Product Development Director rather than CEO. Certainly he needs help from more experienced management and access to greater resources in view of the strength of their main competitor.
Tencent may well increase their stake as the shares continue to weaken. In effect Tencent may see this as a way of developing influence and understanding markets outside China by the back door. Without access to Tencent’s resources Snap’s prospects look precarious at best.”
For me, the woes of Snap Inc. are most accurately captioned in this one statement from John Colley: “In short Snap are paying the price for being a follower after a formidable first mover has built an almost unassailable position."
I think the founders of Snap had highly buoyant aspirations to carve their own path in the social media landscape Facebook created, but with a few years gone it is becoming more and more evident that terrain has not been very fruitful for them. It may be time to consider how they themselves can create capabilities more in line with what others’ have found successful to go with the grain versus against it. Others say some humility from the CEO might do wonders as well.
Any new Snapchat update that is not directly driven to quickly monetize their user base is misguided in my opinion. Improving its chat function may be a nod to WeChat’s influence but going after an older generation seems off when its well established that as age increases, the amount of apps used grows less and less, the influence from ads goes down, and there is an unwillingness to jump into using an app they’re not already familiar with. All of these combine to create a large hurdle that I don't think Snapchat has the time to chip away at in hopes of saving themselves.