November 2018:
I thought I could compile my thoughts on this in a tweet thread, but it turned out to be waaaaayy too long. Which explains the weird formatting, sorry!
Snap’s market cap recently hit $5/share at a 5 bil. market cap with falling DAUs. In a non-Wall Street way, here’s a more nuanced explanation of what’s wrong thats not “Insta Stories!” and why to still be optimistic about the future.
Snap has reached saturation in it’s core market of teens - younger millennials + GenZ in NorthAm. To grow it will obvi. have to expand internationally, expand demographics or increase engagement even further with it’s current base.
Expanding demographics is the most challenging of the three; Snap is engaging but not a utility that allows it to be sticky like Facebook was as it became less “cool” and shifted to adults. Adults also have smaller social circles so they can express themselves the same any network
It’s easy to say IG cut off Snap from it’s next 100 million intl. users by copying Stories, but Snap never really had a chance. For 1:N communication, total network size and amount of content matters (and “authenticity” is less of a premium) so IG was inevitably going to get there.
At this point, Snap is back to a chat app, the “fastest way to communicate” per Spiegel. The: good: chat is sticky and switching costs are high meaning there’s a medium-term floor on daily engagement with US teens + young adults. The bad: hard to monetize, intl growth is harder
The first chat app in most international regions remains even if more functional products emerge (see: failure of WeChat despite $$$ spend in Latam). And Snap is a victim of it’s own brilliance; they can’t drastically modify or + features without killing core functionality
In addition to optimising for ad-space, the failed redesign was also a way of testing the amount of “UI real estate” that a mobile-native company has. FB and Goog. unbundled their value-add desktop products as the shift to mobile happened (Messenger, Maps, Gmail).
But with app saturation, even the giants have had to turn to new platforms to unbundle value and build new features (Portal, Voice, etc.). Snap tried to unbundle unsuccessfully to hardware with Spectacles as a way of featuring parts of their non-core product visibly
Interestingly, there’s been few consumer mobile-native companies that have been able to build parallel distribution (new apps) or in-app features that drastically extend the core product (AirBnb Experiences), esp. when no cost incentives exist (i.e. Uber Eats)
All this to say that Snap has to grow engagement but within the constrains of their existing core UI on a single platform (mobile) and without sacrificing the “liberation” for young users that allows them to be themselves by limiting the scope of broadcasting.
Snap’s susceptible to copying because it fundamentally has the same social graph Facebook and Insta (digitisation of offline w/ friends and family) whereas other networks like Twitter/Reddit have unique network graphs from creating relationships that wouldn’t otherwise exist
Snap initially beat Facebook by creating a mobile-first, faster, more private and funner underlying graph for newer generations. But once Facebook had IG to combine a content interest graph w/the social graph, Snap couldn’t compete in a zero-sum attention game
Expecting Snap to constantly create new innovative products in the general 1:1 communications space presumes that most iterations of failed social startups are a lack of distribution rather than a saturation of 1:1 or 1:many human comms on mobile, which is debatable.
The prob. is evidence points to the latter being true; since 2014, there hasn’t been one new standalone social product to break 100 mil MAU over a 6 month period, including giants/startups. Snap’s built great products (Maps, Discover) but great products != effective products.
At this point Snap has two realistic options of growing without drastically changing the layout of their app: 1) become a visual utility tool that has sticking power using the camera as a driver or 2) reach the holy grail, multilayered chat aka infamous “app within an app”
As @benedictevans pointed out in Mobile 2.0, the most practical next wave of technology comes as smartphone resolution improves and we start to use the camera as an input as opposed to a user tool around the world.
There’s a lot of different attempts at visual utility (ex. Google Lens) but Snap is the only product with traction that already has the instant camera engrained within user habits as a tool, whereas IG represents using the camera on more sporadic intervals.
And to it’s credit it’s started exploring utility w/ visual search! But there’s still a lot of lightweight AR-ish apps that can still be build to create new connections w/others based on same interests or explore the world (ie. 3D maps). Think of each tool as a filter to view the surrounding world!
Re: app within app. When people say iMessage is now Snap’s biggest competitor it isn’t wrong. But as @benthompson points out, fundamentally Apple is constrained from maximising iMessage’s functionality because of the app strategy tax it pays.
Full potential iMessages cannibalizes Apple’s investment in having apps at the core of the iPhone and the 30% rev. they get from in-app purchases. If group chat is the new social network, iMessage and Snap are both positioned to own it, but only one has the incentive.
Multilayered chat involves building both existing iMessage integrated apps (ie. Yelp) but primarily adding features that are valuable but unviable as standalone products (i.e. Tilt, Group Travel). And app within app isn’t limited to extending functionality within existing groups
As @jmj pointed out Snap is the natural communication tool for the ill-defined relationship between Facebook friends and having someones phone number. Having a way to build new “closed networks” involving nearby unknown people based on location
To monetise, Snap will also have to extend from group chats into building small, private interest communities around meeting these new people offline to counter the natural content limit on 1:group chats.
Adding to that, there’s a strong “developer distribution” gap out there that works for both strategies. That is what’s the channel that young developers can build a small MVP on top for fun and get instant traction without having to build a “perfect” product?
It’s moved over the years from early Web -> Facebook Connect -> Early App Store. With no logical new platform, Snap feels like the place this might happen w/ the camera as the new de facto API. Challenge is growing this wo/overwhelming users w spam.
The only contrarian take I have is that Spiegel was never great at building new communication products, he was great at integrating artificial limitations on existing products into our lives as our choices became unlimited. Limitations on time, on how perfectly you had to present yourself, parental concerns. Which makes Snap perfectly positioned for developer platform.
Of course Snap is going to have to stay afloat for a couple more years to pivot. The reality is that they aren’t as bad at monetizing as people seem to think ($2.09 APRU vs $1.21 APRU YoY) but their revenue growth probably isn’t as sustainable as thought of.
Snap, seeing the limited data points on it’s network + performance of FB, GOOG + AMZNs direct response ads was smart to initially go the brand advertising route instead of going right to self-serve.
The problem with online brand advertising is three-fold: it’s extremely hard to quantify return, it requires a huge upfront investment to be able to be able measure tangible shift and it’s particularly susceptible to eCPM decay over time, especially for single product brands
For bigger brands, the problem isn’t the return but rather the investment that doesn’t come attached to the targets for direct response ads. Building out infrastructure, data collection, and P&L for them has a massive opportunity cost attached to it. This would tend to inflate upfront RPU and could potentially decline over time.
The other strategic mishap was trying to monetize heavily from a value-add such as Discover. Assuming attention is a 0 sum game, there’s no Snap would be able to compete with Instagram on the amount of content generated.
The company and people around it were fixated on shifting TV brand advertising by building TV for the mobile age through “passive consumption”. Looking at TV the decade before the Internet shift, by far the most engagement passive viewership was through reality TV and live events, not news and short sitcoms.
Also some of it’s prominent millennial-focused media partners built their empires (Buzzfeed, Vice) on creating content that optimized shifting distribution channels (FB, YT) instead of vice versa which makes them far from guaranteed success on Snap’s platform.
The end game if Spiegel can’t turn it around? Apple is illogical; it could take out Snap on by literally just copying visual messaging onto iMessage and integrate w/the rest of it’s “social network” but it faces the strategy tax which leaves Google and the Chinese giants.
Google’s big barrier to undercut iPhone’s dominance in NorthAm markets it needs to have a chat platform that works independent of OS. They’ve been trying for years with Allo, etc. Add in the integration of YouTube to create a single rich media platform and Google’s existing hardware capabilities and there’s something there.
But worth mentioning Snap’s biggest financial commitments are to Google Cloud and are their biggest customers @ approx. 2 billion over 5 years. If you’re Google in 3/3 among big cloud providers and you buy your primary customer, thats a premium +not a good look.
The Chinese companies need existing distribution to expand the presence of their multifunctional apps across borders. They could extend Snap in China but also use as a way to start incentivising cohorts of teens on a new financial system by giving away capital as they did in China.
Personally I have faith in Spiegel to build great products, but TLDR to survive they’ll have to build in products that either create new relationships or create utility.