Is Snap more like Disney than Facebook ?

Snap Inc (Snapchat’s parent company) listed its stock on March 2, 2017 in the NYSE exchange. It was one of the most awaited IPOs of this year after an uneventful 2016 where the number of tech IPOs hit their lowest point ever in the decade. It didn’t disappoint as its shares popped 11% on the 2nd day of trading.

Snap’s S1 SEC filing provides quite a lot of insight about its current business. However, what exactly Snap aims to be in the future has been very cryptic. It calls itself a “Camera” company but it has left a lot of people scratching their heads as to what that really means. Facebook is a natural comparison, and some investors also worry about Snap turning out to be more like Twitter. However, Snap itself, doesn’t want to be called a social media company.

Piecing together the elements of Snap’s strategy as revealed over the last few years and in its S1, I’ve tried to decipher here both Snap’s product strategy as well as its future business model.

Going back to its S1 filing , some points are interesting to note.

  • Engagement: Snapchat has a highly engaged young demographic that opens the app 18 times a day and spends 25-30 minutes on it. More than 60% of DAU create snaps daily, more than 60% engage in chat daily, and over 25% post to their Story each day.
  • Revenue: In North America, Snap’s ARPU (defined as revenue divided by daily active users) in Q4 2016 was $2.15, up from $0.65 for the same period the prior year. Snap notes that over 70% of overall advertising spend and nearly 85% of mobile advertising spend comes from the top ten advertising markets, according to International Data Corporation. On average, over 60% of SnapChat’s DAU come from countries on this list.
  • International: Snap sees far more engagement on iOS than Android and has prioritized iOS development so far. It also notes that Snap’s ability to succeed in any given country is largely dependent on its mobile infrastructure and its advertising market. These factors influence its product performance and monetization opportunity in each market.

Focusing on depth, not breadth

While comparisons with Facebook are inevitable, one of the key differentiating factors of Snap has been its focus on depth of engagement rather than user growth in its primary app, SnapChat. It continues to focus on its core demographic — 18 to 24 year olds, while addressing new use-cases to serve that same user-base. It has added a variety of differentiated features such as Lenses, Geo-filters, Stories etc. to keep its core user-base engaged. So far, it has not invested in making its product more accessible/understandable to older users. Even traditional features such as its Discover unit that allows users to subscribe to publishers, has content that’s tailored specifically for younger users.

Snap has also noted in the past that it has replaced TV for millennials. And it has not been shy about the fact that it wishes to accelerate this trend. The company has invested in original programming in both news and entertainment categories to capture the shifting attention from television to mobile in the demographic it serves.

Image: https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm

From all the above, it appears that Snap’s strategy right now for its primary app SnapChat is not to build the biggest user-base but rather to build a user-base with the deepest engagement on its platform. In this sense, it resembles TV channels such as ESPN more than Facebook. At its peak in 2013, ESPN served only 99M users but brought in $4B in advertising revenues. It commanded an ARPU of $40 primarily driven by the hours of sports that users watch on its channel. Compare that with Facebook, that serves 1.23B+ users and brought in ad revenue of $26B in 2016 with a global ARPU of only $4.83 (and $19.81 in the US& Canada). FB serves 12X more users than ESPN but brought in only 6.5X more ad revenue. As television watching declines, if SnapChat is able to deepen its engagement and command similar ARPUs as ESPN, it can rake in a lot of revenue while serving a much smaller user-base.

But what’s the growth story?

While SnapChat can get away with serving a narrow demographic for revenue, if it has to justify its 34X revenue multiple, ultimately users are going to be the engine of growth for this company. So, can Snap ever rival Facebook ?

This is where I believe Snap can grow by becoming more like Disney than like Facebook. Facebook’s platform is its social graph. Whereas Snap’s self-professed platform is the camera. Thus, Snap’s strategy seems to be to build a portfolio of products that addresses the needs of a wide variety of user segments leveraging the camera, without diluting the core value proposition of its primary app, SnapChat. It’s CSO Imran Khan has also mentioned the same “We rebranded our company to Snap Inc. because we are bigger than just one app.” Snap has already shown its appetite in this direction by building Spectacles which is a recording device and could appeal to users beyond its primary 18–24 demographic.

Snap does have a path to acquiring a large user-base without following the same blue-print of growth as Facebook. It can follow the way Disney has a built a portfolio of channels, each serving a narrow demographic. There’s no denying the fact that the Camera is an important gateway on the mobile phone today. Users take pictures, call friends, record videos, upload receipts — all through the camera. What exactly Snap builds next is up for imagination.

However, the risk is that it’s really hard to create a multitude of successful products than it is to grow an existing successful product. Snap seems to be aware of this risk and calls this out in its S1 as well.

“Our strategy is to invest in product innovation and take risks to improve our camera platform… While not all of our investments will pay off in the long run, we are willing to take risks in an attempt to create the best and most differentiated products on the market.”

This, along with the total control that Evan Spiegel and Robert Murphy maintain over the company, signals that the founders are not going to shy away from taking on bold new bets. Of course, acquisitions can also be one way to accomplish this. So, investors in Snap will be essentially betting on Evan and Robert’s creative genius to propel the company to the scale where it can live up to its current multiples. Whether that pans out or not, only time will tell. As a product enthusiast, I am curious to know what Snap builds. But if I were to put on my investor hat, this is a high risk stock.

Disclaimer: I am a Product Manager at Facebook and the opinions expressed in this post are my own and not my employer’s.

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