• by John Motavalli , Columnist, May 17, 2017

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.