Snap’s Herculean Ambitions
Having been through a decade of growth and achieving a seemingly wild valuation, Snap is now facing the wroth of the public markets. Its share price reflects investors’ dwindling patience in waiting for the company to generate a healthy profit at scale.
Like Hercules trialling through his infamously brutal labours so that he could be accepted by the Gods into Olympus and attain his immorality, Snap is looking to prove to the market that behind its product brilliance is a robust business model with scope for valuable long-term growth. This post explores these two stories — one mythological and one technological— to see how one may inform the other.
Part I: Ascension
“As the offspring Zeus, king of the Gods, and Alcmene, a woman of mortal satire, Hercules was born a demi-god with unrefined abilities of power and stamina. After coming to understand the gifts which he had been given, Hercules set out and achieved a series of incredible feats; he slayed abominable beasts, showcased immense strength, and refused to blink in the face of tribulation. As Hercules’ successes mounted, his fame swept across Greece.”
Much like Hercules, Snap’s formative years were marked by a series of brilliant achievements which helped grow its popularity and reputation. The company was born in 2011, after two Stanford University undergraduates, Evan Spiegel and Bobby Murphy, re-released a new version of an app they had previously created called Picaboo. The new app had been refined to enable its users to send ephemeral, image-based messages to each other on a one-to-one basis. They sought a name that reflected the simplicity of their offering and encompassed the product’s core feature; they eventually decided on ‘Snapchat’. While seemingly simple on its surface, this debut product captured the attention of teens who were waning from traditional social media platforms and were inactively seeking an alternative. Snapchat cut to the core of what this user segment wanted:
- It focused on personal communication between close friends instead of broadcasting to the public audience of an entire platform
- It made all messages self-deleting, in stark contrast to the permanency that was attached to actions on traditional social media networks
- It was made exclusively for mobile, with the camera at the heart of the entire product experience
With these core principles at heart, usage of Snapchat soared upon launch — particularly among affluent teenagers. Within a year, the company was approached by Facebook CEO and attention merchant Mark Zuckerberg, who brought with him a cash buy-out offer worth approximately $3 billion. While this could have been the end of the Snapchat story as far as its life as an independent entity was concerned, instead it became a first marker of the founders’ belief in the long-term viability of the product and its core values.
After rejecting the offer, the Snapchat app soon received an update that would solidify Spiegel and his team and some of the greatest and most innovative product developers of their generation. Indeed, the ‘Stories’ function, which enabled users to broadcast an image or short-video to all of their friends using Snapchat that would disappear in 24 hours, was an overnight success. It captured the essence of the original Snapchat proposition which brought the app its initial fame (friend-focused, mobile-only, camera-centric), but also encouraged sharing in a way that one-to-one messaging simply couldn’t.
The result was rocket fuel for the company. Monthly active users of the app grew exponentially, as did the level of engagement that each user was giving to the app on a day-to-day basis. By August 2014, nearly half of all teens in the US were using Snapchat daily. Snapchat had proven its ability to make products that teenage users loved, so much so that they were even willing shift away from pre-existing alternatives enabled by network effects.
Part II: Stagnation
“Just when Hercules’s’ rise seemed to be without limit, his world was turned upside down. Zeus’ wife, Hera, looked upon Hercules’s’ success with twisted jealousy. Unable to contain her hatred for her half-son’s newfound glory, Hera drove Hercules to madness and forced him to murder his wife and children. Hercules was paralysed by his grief, and thus his once rapid ascent was stopped in its tracks.”
Having rebuked Facebook’s initial buy-out offer, Snapchat had inadvertently lit the fire in the belly of a titan that, like Hera, was inspired by jealousy and prepared to do anything to vanquish its foe. Facebook wanted to ensure that if teens were spending their time on their phones, that time would be spent on an app that was part of its own family.
Facebook’s first attempted to use its sheer availability of capital to quash the new app on the block. It is reported that three buy-out offers were made, and that all three were (not so) humbly declined. This is Facebook’s standard playbook: identify a company rising in popularity among target users, and make the founder(s) an offer that cannot be refused. Having worked in the past with Whatsapp, Instagram and over 70 other companies since its launch, this outright rejection would have no doubt surprised Zuckerberg and his fellow execs.
Failing this, Facebook’s jealousy drove it to employ a new strategy: mimicry enabled by scale. Indeed, Facebook saw the popularity of Snapchat’s ‘Stories’ function as a new way to drive engagement from its own users and thus a new way to generate advertising revenue. It promptly copied the feature from Snapchat and aggressively rolled it out across the Facebook family of apps, most successfully with Instagram, but also with Whatsapp, Messenger, and Facebook Core. This copying did not only reduce the competitive advantage Snapchat held among teens. Crucially, it also stunted Snapchat’s potential growth, both in terms of users from other age segments, and revenue from new advertising clients. If Snapchat’s core product feature was already available in a host of other apps which people used daily, why give this ‘Snapchat thing’ a chance? And if advertisers could reach teens posting Stories on Facebook-owned services, namely Instagram, why bother with an unproven platform which takes time to learn before you can achieve a return on investment?
And thus, after 3 years of Facebook-inflected pain, the results have become clear: Snapchat’s user growth has stalled, its future revenue ambitions are perilously in doubt, and its stock price — now trading at half of its IPO — has been forced to reflect these conditions of uncertainty.
Part III: Tribulation
To win back the acclaim of his mortal fans and the Gods whom looked on, Hercules set about to complete a dozen arduous tasks; he showed might in defeating the fearsome Hydra, patience in cleaning the infinitely large Stables of Augeius, wit in trapping the allusive Cerynitian Hind. After a total of twelve excruciating Labours, Hercules had atoned for his sins and proven his followers wrong.
As we enter the final financial quarter of 2018, Snap is now plainly in the longest trough of the company’s history. Its stock is at an all time low, and many investors are questioning the viability of its business model going forward. Like Hercules, Snap is now required to prove to its followers and dissidents that through gruelling work can come deserved reward.
While Hercules earned redemption through physical hardship, Snap will have to achieve similar ends through means of strategic experimentation. Most crucially, it needs to identify a business model that aligns with its core strengths and provides a scalable route to long-term value generation. Facebook has flexed its muscles in the advertising world, showing why few companies have attempted to take a share of its ever-growing ad revenues, and why none have succeeded. A move away from any conventional advertising-related model is necessary to the company’s success.
Early signs of this change in mentality are showing. Evan Spiegel has spent over a year pushing a narrative that one of its core differences with Facebook is Snap’s principle of “separating the social from the media”. He believes that long-term, healthy user engagement is derived from prioritising connection with close friends first, not by diluting feeds with algorithmic content from brands and advertisers. In a memo to employees leaked in September 2018, Spiegel made clear that his strategic vision for the company was now to become “the fastest way to communicate”. Indeed, he made so clear as to repeat this phrase 25 times within the 6,500 word memo.
For many investors this is presents a worry: Snap was valued as a social media company, an industry with proven heights of profitably. While messaging certainly mimics social media’s usage among consumers, it certainly does not mirror its profitability. No western company has been able to find a viable business model for stand-alone messaging applications that generates the same scalable value as seen in social media platforms. That Snap believes it can do this is certainly audacious, and to some simply desperate. But it also shows a commitment to finding a business model that cannot so easily be undermined by Facebook — a company that to date has largely failed to monetise two of the world’s largest messaging platforms, even with having run both for over a decade. Facebook itself might be waking up to the long-term opportunity of messaging, or rather the necessity to make it a priority. Zuckerberg stated in his most recent earnings call that: “Public sharing will always be very important, but people increasingly want to share privately too”, and thus his team are “seeing the way people connect shifting to private messaging and stories”. If this is the new battleground, then Snap may very well find itself better prepared than ever before.
Part IV: Redemption
“And so, having proved his worth to all whom had doubted him, Hercules sought back his immortality and a return to Olympus to live with the Gods. While Hera flatly refused the request, Zeus decreed that his son had earned his place in the Heavens. His wish being granted, Hercules settled in Olympus, but would always wear the battle scars of his Labours.”
If Snap is ever to find the success that its resilient investors believe exists beyond the horizon, it will need to achieve victories that are truly Herculean in their ambition. Many will argue that its tricks of innovation are used up, and that all that remains is a company on the verge of crashing off its runway. Only a look into a possible future of the technology landscape gives credence to the company’s potential long-term viability.
Crucially, Snap has aligned itself with multiple mega-trends that could help lift the company out of its current dearth of success:
- It has kept to its principle of being privacy-first and collecting very little data on its users, even while this antithetical to most companies with ad-based business models
- It’s Discover feature distributes mobile-first content to users, made in-house by Snap or in partnership with established media outlets, in an attempt to pry eyeballs away from traditional TV and established online players like Youtube, as well as newer services like IGTV and Facebook Watch
- It has made significant efforts into understanding the power of Augmented Reality to drive real-world engagement, in opposition to Facebook, who has persevered on its task of disseminating VR to a billion consumers around the world
- It has built a range of other features which drive engagement in novel ways such as its location-based product, the Snap Map, or its messaging addition, Bitmoji
- It has even seriously explored hardware, releasing its Spectacles to the general public in 2016, though ultimately ordering too many in the first instance
Nonetheless, just as Hercules relied on the support of Zeus to ascend back to Olympus, so might Snap need aid from a technology titan in order to achieve some form of victory. Indeed, the patience from its public market investors is wearing thin, and Snap’s cash reserves are becoming increasingly depleted. Many have touted Jeff Bezos as a likely acquirer; a trial launched in the Summer showed how integrating Snap’s camera technology into Amazon’s shopping platform can drive product discovery and generate revenue outside of traditional advertising. While the benefits of this partnership are clear, the wider strategic alignments necessary for an acquisition don’t seem present. Apple, on the other hand, seems like a far superior strategic partner. Tim Cook has clearly laid out his company’s dedication to user-privacy, focus on uses of the camera and Augmented Reality as a growth area, and overall commitment building out iMessage as a moat for Apple products more widely. It also helps to have over $285 billion in the bank.
Spiegel will no doubt be hoping that such an acquisition is never necessary. His last 12 months at Snap has been spent trying to bring the company’s future back into its own hands. He has secured a new boost of funding, undergone a restructuring of the organisation which led to many being let go, and pivoted the company’s mission to become “the fastest way people communicate”. With a target set to be profitable by the end of 2019, we will soon know what rewards will be reaped from these actions.
One thing is clear: if Snap is to succeed, Hercules’s labours will seem a small feat in comparison.
