Snapchat: Business Strategy

This video presents a discussion and my opinion of Snapchat’s business strategy. Enjoy!

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Script:

Ah, the benefits of paper wealth ;P

(Title)

Welcome to Art and Finance. Now, anyone can understand business, economics, and finance.

Today we’re gonna be talking about Snapchat, the app, and its parent company, the recently renamed “Snap Inc.”

For some of the elderly watching this, (you know who you are, over-35-year-olds!), Snapchat is a messaging app where you send pictures and videos, known as “snaps” to your friends and network. After 24 hours, these snaps disappear from the app, and also from Snapchat’s servers. The fact that Snapchat, with its ephemeral, rather than permanent, messaging service, has become so popular with the youth (41% of age 18-34 demographic daily in US , more daily users vs. Twitter), upends previously held beliefs about how people consume and produce social media. 

Snapchat also introduced further innovations. 1) Snaps are displayed in chronological order, known collectively as “stories”, as opposed to the latest-updates-first you find on Facebook and Twitter; the idea, clearly, is that social media content is consumed in a story format. 2) Snapchat also features Live stories, which are curated groups of different stories from different users. 3) There are no likes and comments, meaning less judgement and potentially, encouraging user content creation. 4) It’s also worth noting that Snapchat’s user interface is notoriously difficult to use, lending the app a perception of privacy. All this from an app that kids allegedly first used to send dick pics to each other. (Disappearing pics = no one knows about it!)

All this is nice, but the most important question, from a business perspective, is: will Snapchat be profitable?

Maybe you’ve heard of Evan Spiegel, Snapchat’s CEO and co-founder, who famously turned down a $3 billion acquisition offer from Facebook in 2013. The guy is now worth about several billion dollars, and is already engaged to Miranda Kerr. Despite this, Snapchat is not profitable. Much of Spiegel’s net worth is based on his 15-20% ownership of Snap Inc.,  which in turn was valued by private, not public, investors at $17.8 billion in May 2016. How can a company that is not earning a profit be valued at such levels? Private investors are betting on the growth of users of Snapchat, which, hopefully, the company can monetize, by selling something consumers will pay for, or distributing ads consumers will watch. In my view, the sort of wealth that Spiegel has is largely “paper wealth”, since it’s based more on what investors think Snap is worth, rather than any physical assets Spiegel owns.

So far, Snapchat earns hundreds of millions in revenue primarily from ads that are woven into user stories and select publishers’ stories, which are found in the “Discover” section of the app. However, as I’ve said before, Snapchat is not profitable, and here we bump into a challenge for the company.

If Snapchat, in order to grow and become profitable, attracts older audiences and allows more publishers and advertisers onto its platform, it risks becoming Facebook-like. This may turn off its core audience of kids and teens. The initial attraction of Snapchat, after all, was privacy.

So how will Snapchat grow into profitability, without losing what’s made it special? The answer seems to be in its first-ever physical product, Spectacles.

In September 2016, Snapchat the company renamed itself Snap Inc., with Spiegel announcing that Snap is a “camera” company, rather than the software startup it appears to be. It released Spectacles, which are basically fashionable sunglasses that can record video, which you can upload to your Snapchat app. Not long after, Snap announced that it will go public in 2017, as early as March.

Recently, the Wall Street Journal commented that Snap’s strategy with Spectacles, despite the sunglasses being in “testing mode”, may be to show potential public investors that Snapchat isn’t a one-trick pony, and there are supposedly other revenue streams beside its currently loss-making business. This puts Snap in an interesting situation. To show potential public investors that it can be profitable, it’s moving into other markets, but, it needs public investor money to grow in these same markets. After all, some speculate that Snapchat could use the IPO proceeds to acquire AR and VR technologies, similar to what’s being used for Spectacles.

The title of this video is “Snapchat: Business Strategy”. So, what exactly is their strategy? Do they even know? To be fair, it’s natural to be loss-making and changing up your strategy when you’re a startup trying to establish yourself. The tech industry even has a term for it: “pivoting”. So if Snap is indeed pivoting, let’s look at what their two broad challenges are.

First, we’ve already outlined the challenge of its legacy business – how to grow the Snapchat app and become profitable without turning off its user base. The second challenge, which we will now discuss, is how to grow its purported camera business.

Spectacles aren’t the first “smart glasses” to hit the market. Google Glass came before it, and… it didn’t do so well.

Snap looks like it learned from Google Glass. Spectacles are priced at $130, vastly more affordable than Google’s price of $1,500. Also, rather than use a design that has been ridiculed by some as being too techy, they’ve come out with something that looks more… fashionable.

This might not be a surprise, since Spiegel’s background is in product design, not coding. In this way, Snap’s design focus brings it closer to Apple, rather than the coding-focused Google and Facebook, in my view. But even if some consumers find Spectacle’s designs attractive, would there be enough of them to bring Snap to profitability?

Let’s look at the example of Apple. Many have focused on the genius of Apple’s design and marketing. Yet despite this, Apple’s revenues are still largely driven by the iPhone – if it were truly a lifestyle brand company, why haven’t the majority of iPhone purchasers migrated over to their other products?

If we put consumers’ purchase intentions on a spectrum with “form” on one end, and “function” on the other, maybe Apple’s iPhone might be toward “function”, given that it’s basically a portable computer, and maybe Apple’s watch, which might not be selling well, on the “form” end. Over in the form end, yes, you may have your niche market that loves the product, but not everyone is motivated to buy. Snap’s risk with Spectacles is that it’s more form over function and not enough people buy it.

In fact, Snap’s very much marketing Spectacles as a lifestyle, rather than functional, product. It’s restricted supply and made the act of buying it an experience in and of itself. You have to be in the right place and the right time when a Snapbot vending machine selling Spectacles pops up.

Tell me, does this sound like a tech company? Or a camera company? Or… a fashion company?

(IT SOUNDS LIKE A FASHION COMPANY)

If Snap pivots to becoming both a messaging service AND a fashion company, they have a whole new list of challenges, not least of which is competition. Would they go up against established players like Ray Ban, or even startup darlings like Warby Parker? If Snap extends further into wearables such as clothing, would they go up against Zara? Now THAT would be interesting.

We should learn more about Snap’s strategy once it goes public and discloses the use of its IPO proceeds to public investors. It’ll be interesting to see in what directions Snap takes its business. In the meantime, here’s who we’ll be looking at next week.

(Fin).

Ramon Rodrigo Cuenca, CFA
Equities Analyst
Art and Finance

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