Commentary

Snap: Teenage Fad Or This Year's Silly Putty?

Is Snapchat in trouble because it is a teenage fad or because it isn’t big enough to compete with the Facebook/Google duopoly?

Probably both.

Whenever a CEO starts squawking about “educating advertisers,” one knows his company is in serious circumstances. If advertisers don’t know what Snap is by now, they’re never going to.

Last week, Snap Inc. issued its first ever quarterly earnings report as a public company. When we first wrote about it, we were wildly optimistic, based on the glowing reports we got from teenage relatives who love the service. But now, with a disastrous earnings report that sent the stock tumbling by 25%, we’re not so sure. Teenagers are fickle, aren’t they? Listen to Snapchat on the subject, from its 10-Q filing:

“This demographic may be less brand loyal and more likely to follow trends than other demographics. These factors may lead users to switch to another product, which would negatively affect our user retention, growth, and engagement. Snapchat also may not be able to penetrate other demographics in a meaningful manner.”

What this document reveals is that Snap’s Daily Active Users (DAU) has stopped growing. The company managed a net loss of $2.2 billion with a diluted loss per share of $ 2.31. Moreover, advertising is definitely going in the wrong direction. Snapchat’s ARPU (quarterly revenue divided by the average Daily Active Users) is down from 2016. For the first quarter of 2017, it was 90 cents, as opposed to $1.05 in the fourth quarter of last year. Not only is revenue declining, but it’s still minuscule compared to rival Facebook, which is collecting some $20 per user now. (Snap says this quarter is traditionally not its best.)

Reading the 10-Q, we also discovered that Snap aims to increase DAUs by moving into scripted original series. We have heard this before.

First, it was hard to miss the announcement that Facebook is planning to launch its own online TV service. And Snap is hardly in a position to compete with Facebook’s deep pockets.

Let’s also recall that when Yahoo! hired Terry Semel back in 2001, it was for the express purpose of promoting Yahoo! as an entertainment medium. Why else would you hire him, since he had run Warner Bros. studio and didn’t even know how to use email?

During the six years he was there, Semel collected almost half a billion dollars from Yahoo! but never managed to create any actual hit series or movies. Nice work if you can get it. Why would Snap’s Evan Spiegel think he could do better?

We have the curse of a long memory. Most have now forgotten that Microsoft also once thought it was a TV studio. The company’s long moribund MSN once boasted a plethora of TV-oriented channels, including an interactive game show called “Netwits,” a women’s service called “UnderWire” and a celebrity-focused series called “One Click Away.” Any sound familiar?

What is unique about Snapchat is the innovative use of digital pictures the service pioneered, coinciding with phone devices usurping cameras. Snap worries in its 10-Q that Google and Facebook could copy any of its features they feel like copying, perhaps cognizant of the fact that Google’s earliest advertising applications were borrowed from then vibrant search engines like goto.com and LookSmart. Who remembers those guys today?

We realize companies have to disclose certain things in these filings. But why give Google an action plan to drive them out of business. We have it here in nice bullet points: “In addition, Google may take actions beyond our control that could seriously harm our business, including:

  • discontinuing or limiting our access to its Google Cloud platform;
  • increasing pricing terms;
  • terminating or seeking to terminate our contractual relationship altogether;
  • establishing more favorable relationships with one or more of our competitors; or
  • modifying or interpreting its terms of service or other policies in a manner that impacts our ability to run our business and operations.”
In other words, Google could destroy Snap. Of course, we don’t think Google will do so. That would make them look anti-competitive and unkind, and they wouldn’t want that. Besides, with the trend the way it is, Google doesn’t have to do anything. They just have to sit and watch Snap stock slide and sink into the muck of Hollywood hype. If the stock falls far enough, maybe they’ll buy it.

Correction: An earlier version of this story incorrectly stated that this was Snapchat's first earnings report as a private company. It is Snap Inc.'s first report as a public company.

8 comments about "Snap: Teenage Fad Or This Year's Silly Putty?".
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  1. Henry Blaufox from DragonSearch, May 17, 2017 at 12:14 p.m.

    Kids? Fickle? Who'd a thought? Now, where did I put my old bell bottom blue jeans?

  2. John Motavalli from Freelance, May 17, 2017 at 12:18 p.m.

    I'm reaching for my bong as we speak. And Facebook is now starting an online TV service. And Snap is going to compete with that? 

  3. Douglas Ferguson from College of Charleston, May 17, 2017 at 2:05 p.m.

    The beauty of Snapchat for advertisers is that the users actually have to keep their fingers on the screen to see the ad, unlike regular TV where it's impossible to know if the viewer is even in the same room. I am not arguing that Snapchat will survive, but it certainly has a means of measuring engagement that is much closer to foolproof than old-school ratings and shares.

  4. John Motavalli from Freelance, May 17, 2017 at 2:20 p.m.

    So Douglas, if that's true, why are Snap's numbers so disappointing? I'm sure that why Spiegel says advertisers have to be educated but I'm not sure they have the patience for that.

  5. Ari Rosenberg from Performance Pricing Holdings, LLC, May 17, 2017 at 5:49 p.m.

    Hey John good stuff -- SNAP does deliver greater engagement but it takes more work from advertisers to make "ads" that fit the snapchat experience -- their bigger problem is they will never attract the millions of small businesses who spend ad dollars on FB and Google because the small business owner doesn't use Snapchat the way the use Google and FB so they don't see the value of directing a budget that way and if they did they would look at their CPC and cancel -- SNAP's best chance is to earn those TV ad dollars that target this younger audience and I think they will be successful at that but will that be enough?

  6. John Motavalli from Freelance, May 18, 2017 at 7:04 a.m.

    I think I see some of the logic of CEO Spiegel. He's thinking of MTV. My old buddy Tom Freston figured out that the only way for MTV to mature was to change the programming from videos to measurable programs. Previously, MTV did lousy in the Nielsens because who could remember what show one had watched? Which VJ was on? It was undistinguished blur. So Freston moved the programming into game shows and the like. Similarly Spiegel wants a hit show for watercooler talk about Snap, and for name recognition, and for getting some of that TV ad money aimed at the young demographic. But TV production is so expensive and so difficult to get right that I doubt he has the time to succeed. 

  7. Ed Papazian from Media Dynamics Inc, May 18, 2017 at 9:20 a.m.

    Good points, John, about the ease of developing successful TV programs. You don't just contact a bunch of content suppliers and order up some "top quality" shows. You need a competent staff with the appropriate experience and contacts to initiate the process, a well thought out strategy, and lots of money plus patience  to fully execute said strategy. And even then, some shows will lose their momentum or go off track, creatively, so you must constantly monitor the appeal of your lineup, with replacements planned and in the developmental pipeline----just like the broadcast networks and some cable channels do it. It isn't all that simple.

  8. John Motavalli from Freelance, May 18, 2017 at 10:40 a.m.

    Right, Ed. You also have to have DEEP pockets to absorb the many failures you are bound to have. Consider this statistic: For the average TV season, Here are the averages broken down:
     
    500: The average number of pitches heard by network and studio execs each summer
    70: The average number of pilot scripts ordered each fall
    20: The average number of pilot episodes ordered each January
    5 – 12: The average number of series each network orders each May

    And then, of the shows actually picked up, most will fail.
     

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