The Case For and Against Snapchat

Snapchat is ready to open up and scale, and the challenges it faces reveal a lot about today’s social media landscape

At a time when most social media is under attack for its varying content safety issues, Snapchat stands as an outlier. The former hotshot of social apps has suffered a bit of a stunted growth ever since Instagram blatantly copied its Stories format, but now Snapchat seems ready for a comeback.

Last Thursday, Snap held its first ever partner day in Los Angeles to announce a series of new features, services, original content, and developer tools while highlighting all the advertising opportunities they will unlock for Snapchat. The overarching theme of the event was a two-fold plan for Snap’s future — the company is ready to expand outside of the confines of its flagship app with the help of partners while simultaneously leveraging new services to enrich the user experience to increase engagement in the app.

Turning away from its rather disappointing post-IPO trajectory, Snap seeks to paint a future where its ad network powers other apps, Snap stories show up in partnered apps, and a captivated user base hooked by the social games and original content Snapchat offers, all of which will make Snapchat a valuable social channel to advertisers without too many compromises on user data and privacy.

Expanding the Reach of Snapchat

At the moment, Snapchat’s best competitive advantage is its ability to reach the 18 to 35 audience demo. According to CEO Evan Spiegel, Snapchat reaches 75% of 13- to 34-year-olds and 90% of 13- to 24-year-olds in the U.S. However, its user base has not grown in the past two years. In fact, the latest report from eMarketer predicts Snapchat’s monthly U.S. users will actually decline by 2.8% to 77.5 million in 2019, capturing 37.9% of overall U.S. social media users, down from nearly 40% in 2018.

To counter this downward trend in user acquisition and retention, Snap announced a series of initiatives on Thursday aimed at expanding the reach of its content. It is building its own ad network “Snap Audience Network” to expand the reach of its ads, and will enable users to share stories with 3rd party apps such as Tinder and Houseparty. In addition, Bitmoji, the highly personalizable virtual avatar and a staple on Snapchat, will become available more broadly, with integrations to Fitbit and Venmo enabling users to use their Bitmoji to express themselves outside Snapchat. Most of the integrations are enabled by an API platform called “SnapKit,” which will allow brands and publishers to connect their apps to Snapchat, and utilize Snapchat tools outside of the app itself.

While the idea of building an ad network that runs across third-party apps and websites is nothing new — just ask Google’s AdMob, Facebook’s Audience Network, Twitter’s MoPub, or Linkedin’s Audience Network — it is something that Snapchat clearly needs in order to grow the reach of its ad product. While it may be hard to see why advertisers would choose Snapchat’s ad network over the ones powered by Google and Facebook given their much larger audience reach and consumer data, there will be certain cases in which Snap’s ad network will make more sense for brands. To that end, Snap is essentially arguing that its app has a stronger penetration in the younger demographics that are hard to reach via the other ad networks, and that its vertical, mobile-native ad format modeled after stories will be the most effective format to engage that audience.

Another question mark around Snap’s ad network is around its data policies. Snap didn’t provide details about what kind of data the Audience Network might collect or use for retargeting. As Snap transition its ad operations from a primarily direct-sale model to one that’s primarily programmatic in order to achieve scale, it will also need to contend with the question of how much data it will share with third parties and how it will ensure the security of said user data. A cool privacy feature of Snapkit is that apps automatically disconnect after 90 days of inactivity, which could prove useful, but Snap will need a more comprehensive set of solutions. It is likely that Snapchat won’t share any user data with third parties who embed SnapKit, as there’s no functional need to, but they will be ingesting data from those third-party apps to facilitate targeting.

As for the expansion of Snap stories (or simply “snaps”), Snap is clearly aiming to expand the reach of its user-generated content and collaterally increase its ad inventory, although the company did say it would not include advertising in exported snaps at launch. Extended reach of Snapchat content also increases consumer mindshare for Snapchat, a goal that’s also served by the Bitmoji expansion. There is also a “login with Snapchat” feature in SnapKit that will let users sign up for new apps with their Snapchat credentials instead of creating new ones, and therefore bringing their Bitmoji avatars to the new apps. In short, Snapchat wants to show up in more places outside its app, and it is willing to play nice with app developers and publishers to achieve that goal at the prospect of sharing incremental ad revenues.

Doubling Down on Features That Drive Engagement

One notable thing about SnapKit is that, despite the many integrations it supports, it does not support content creation in third-party apps. Instead, all stories still need to be created in the Snapchat app before they can be easily exported out to the integrated apps and websites, because, at the end of the day, Snap wants users to use its own app. Given its stagnant user growth, it makes perfect sense that Snap would choose to double down on driving engagement among its core user base as it figures out how to better monetize that engaged audience.

The new Snapchat games platform is a good example of how Snapchat aims to drive engagement. Mobile gaming is a sticky, habit-forming offering, and Snapchat wants to make it sticker by focusing on the social play. Users will be able to launch these HTML5-based mini-games directly from group chats and converse with each other via text or voice. If this new platform sounds familiar, that’s because it is basically what Tencent did by adding “mini games” on WeChat, which have amassed nearly half a billion players. Unlike WeChat, however, there won’t be any in-app purchases or display banner ads for Snap Games at launch. Instead, Snapchat plans to monetize the games with 6-second, non-skippable ads that are offered as a way to earn in-game currency and benefits, which is a clever way to ensure the gaming experience and ad viewability by prompting the users to opt in.

In addition to the new gaming platform, Snap also announced a slate of ten new Snap Originals to drive users to check out its Discover section and stay engaged with the app’s content offering. Snap boasts that time spent watching its original shows in Discover tripled in 2018, so it makes sense for the company to keep investing in original content, albeit modestly compared to many other platform owners. For Snap, original content is additive to its overall content offering and helps to drive engagement, which contributes positively to the value of its ad inventories.

Living up to its self-proclaimed title as a “camera company,” Snap also introduced some new camera-based features on Thursday, including a new “Landmarkrs” filter that allows users to add effects to famous landmarks, such as the Eiffel Tower, Buckingham Palace, and the Flatiron Building. The updated Lens Studio, which allows anyone to create AR lenses in Snapchat, can now be used for more than faces: bodies, hands, even pets. Beyond new lenses and filters, the company also announced a new AR developer kit called Scan, which will allow partner developers to create utility features to boost the usefulness of its camera. Scan is notable in that it’s the first visual search platform that’s open to third-party integrations, although details around how one would actually integrate into it remains unclear.

As of now, Snapchat’s camera can identify songs with Shazam and recognize products that link out to Amazon for purchases, but its camera needs to be able to do much more to stay competitive with the other visual search platforms and build a truly engaging experience. To that end, this new Scan platform is a natural and necessary step for Snapchat to build out its AR products and capture more of its users’ time and attention.

The Case for Snap

That last point gets to a core theme of this partner summit event — opening up Snapchat to developers and partners in order to keep growing its audience and scale its ad products. Compared to many other social platforms, Snapchat has long been holding outside developers at an arm’s length. Before it opened up Lens Studio to everyone at the very end of 2017, Snapchat spent years curating limited selections of geo-filters, Discover channels, and selfie filters all by itself, even though it did have partners like Kenshoo and LiveRamp to help out its ad business. While that approach ensured the quality of its user experience, it also severely limited its ability to scale.

Now that its user base has leveled off at 186 million daily users, Snapchat is finally realizing the importance of working with developers to build out its products and drive engagement. Similar to how Siri lags behind Alexa and Google Assistant in terms of user adoption and functionality due to Apple’s reluctance to open it up to outside developers, a closed ecosystem inevitably limits how quickly one can scale.

It is worth noting that part of this “curated-experience” strategy still lives on in Discover, which is a smart move for Snapchat to avoid the kind of misinformation and toxic content issues plaguing Facebook, Twitter, and YouTube today. By retaining tight control over content discovery on its platform, Snapchat is able to position itself as an “anti-Facebook” of sorts, or rather, the kind of secure, private messaging platform that Zuckerberg wants Facebook to become in light of recent regulatory scrutiny and public backlash.

With users fleeing the toxic environment of feed-based social media for more private platforms, Snapchat now has a real shot at re-capturing those users with this positioning. Besides the aforementioned strong hold on younger demographics, this cautious approach towards content discovery and recommendation has now become Snapchat’s biggest competitive advantage in the age of “techlash.” In an ironic twist of fate, Snapchat’s lack of data collection and mature ad products, which has previously limited its ability to scale and monetize, now has become a competitive advantage as it is free to position itself as a private, non-intrusive, brand-safe alternative to Facebook.

Another major competitive advantage that Snapchat has over other social platforms is its future-forward vision. It was one of the first movers in the mobile AR space, and it is clearly aligning the future of the company with the rise of AR as a computing paradigm by putting the camera front and center in its user experience. It may not have the largest user base, but it has always been a key innovator in the social media space. From ephemeral messaging to vertical video to Stories and Bitmoji, it consistently challenges what the social app experience could be on mobile and set new standards in social media. Now that it is finally recognizing the importance of partnerships and opening up its platform, it will likely have a better shot at scaling those innovative features.

The Case Against Snap

That being said, great ideas are no guarantee for success without proper implementation, and implementation has always been a problem area for Snapchat. For example, even though it popularized the revolutionary Stories format, Facebook was able to copy it for Instagram to better results with a cleaner UI, faster speed, and a better ad product, all on a larger scale. Granted, Facebook leveraged a stronger network effect to keep Instagram users from giving Snapchat a try, but part of that can also be attributed to Snapchat’s slow progress at monetizing its Stories at scale, which led more brand advertisers to choose Instagram Stories over Snapchat’s.

As great as all those new features and products that Snap announced on Thursday sound, none of them, with the exception of Snap Games, is live yet. Many details remain fuzzy and leave plenty of room for poor execution. It’s unclear how stories will appear inside apps like Tinder, as the integrations are still in development. The Snap Audience Network, which won’t launch until later this year does not have clear the revenue split yet, and Snap has not signed up any partners to participate. Even the promising Scan platform seems a bit under-defined at the moment and needs to offer stronger and clearer incentives in order to win over AR developers from other AR platforms, or at least make it a good-enough platform for developers to port over their AR creations. Can they keep adding young users as older users ages out, or will they be able to retain the user base by prioritizing useful AR features like visual search over frivolous selfie lenses? Only time will tell.

Another potential hindrance of Snapchat’s commendable AR-oriented strategy is that fact that AR won’t stay on mobile forever. Soon, AR headsets and glasses will become available as mainstream consumer products, and Snapchat’s track record on hardware raises considerable doubt about the company’s future. To this day, Spectacles remains the only hardware product Snap has ever released, and despite the initial buzz and market interest, the camera-equipped sunglasses quickly turned out to be a big money-sinking failure. The long lines for its roving, limited time only vending machines may have led Snap to overestimate demand, but it’s ultimately a combination of limited use cases, poor hardware quality, and an overall subpar user experience that led to it losing nearly $40 million on unsold Spectacles.

Beyond poor execution, fierce competition in the social space remains a big challenge for Snapchat. The way that Facebook was able to bring its mature ad products to Instagram and effectively kneecap Snapchat’s growth is a taunting demonstration of the power of scale in ad-supported social media. With a daily user base of less than 200 million people, Snapchat dwarfs in comparison to the over 1 billion users on Instagram or the 1.3 billion people on Facebook Messenger. While arguably scale doesn’t matter in terms of introducing innovative features and driving user engagement, it does very much matter when Snapchat is trying to become profitable with an ad-based business model. And until we see those third-party integrations in action, it’s difficult to tell how much scale they might generate.

Looking ahead, Snapchat also faces the challenge of having to delicately balance the need to scale its ad business with its privacy-minded data practices. Give the advertisers too little data to work with, the ad business won’t scale; collect and offer too much data for its ad business, then Snapchat risks falling into the same problem damaging Facebook’s reputation and brand trust today. There is no easy way to reconcile these two conflicting pull, and Snapchat will have to be very careful in order to mitigate the expected growing pains as it scales. Such is the fundamental dilemma that all ad-based social platforms must face and solve for.