Snap is not doing enough to diversify its business
Recently, Snap, the parent company of Snapchat, announced that it was launching an accelerator for mobile media startups. Compared to Y Combinator by some, the accelerator plans to invest $150,000 into 10 different startups this year, with a grand total of $1.5 million invested. What’s more, CEO Evan Spiegel and other top Snap executives will be personally involved with the selection process and advise the winning companies. It’s unclear how much equity Snap will receive from these investments.
While this move certainly suggests Snap is looking to diversify its business, the company needs to be much more aggressive about launching and/or acquiring new products that live outside Snapchat if it has any hope of outflanking Facebook, which has been unapologetic in its wholesale copying of Snapchat’s features.
Things have been dire at Snapchat for quite some time. After the app experienced a year of paltry user growth, Spiegel aggressively pushed through a massive redesign (ignoring the advice from his own design team in the process), and rolled it out to the entire userbase in early 2018. By all accounts, the redesign was an unmitigated disaster, with several high profile celebrities panning it and over a million users signing a petition that asked Snapchat to reverse its update. On its most recent earnings report, Snap revealed that the app saw the slowest user growth in its history.
I don’t think I’m going out on a limb here when I say that Snapchat’s long term prospects don’t look good. Facebook has proved too adept at copying its most popular features, and any new innovations for the app are likely to be lifted as well. The Stories clone on WhatsApp alone has over 450 million users, and if you combine the user adoption across all Facebook products, the company has somewhere around a billion users for its Stories products. Snapchat just can’t compete with that sort of network effect.
This is why most of the major tech giants — Facebook, Google, Amazon, and Apple — have highly diversified businesses that extend into multiple product categories. Take Facebook, Snap’s closest competitor, as a prime example: no other competitor has come even close to matching the user numbers for its core app, and yet it’s aggressively acquired companies and launched new apps from scratch. It purchased Instagram for $1 billion back in 2012, and then, shortly after getting rebuffed by Snapchat, bought WhatsApp for a whopping $19 billion. It also spun Messenger out as a standalone product. Facebook now has three separate apps with more than a billion users, and Instagram is quickly approaching that threshold.
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Not only does product diversification protect a company from competition, but it can also strengthen that company’s core business. Google’s main revenue driver is paid search, but its dominance in maps, email, video, browsers, and mobile operating systems allows it to leverage user data in such a way that makes its search engine ad targeting even more precise. The same can be said for Facebook, which collects data across all of its apps and allows you to run integrated ad campaigns that can follow a user virtually anywhere.
Now let’s return to Snap; it certainly hasn’t been shy at pursuing acquisitions, and has been willing to plop down a pretty large pile of cash to purchase companies. But most of its acquisitions thus far have been in pursuit of strengthening the Snapchat app, not launching into new product categories.
In November, for instance, it acquired a company called Metamarkets in an effort to improve its programmatic advertising technology. Last summer it bought a social mapping startup that it quickly integrated into its Snap Map feature, and it’s purchased companies that were later incorporated into its animated lenses and Bitmoji.
There’s certainly nothing wrong with Snap trying to improve and innovate within its core app, but that app has proved time and time again to be too easy to copy by a much larger competitor. It seems clear from the outside that there’s no way Snap is going to go through Facebook, and its only hope of competing with the social media giant is by forging into new product categories and going around it.
When Facebook paid so much for Whatsapp, there were many who thought Mark Zuckerberg was crazy. He spent $19 billion for a company with a couple dozen employees and no real business model. But Zuckerberg recognized that messaging apps were an emerging category that could potentially threaten the dominance of social networks, and he knew his best bet would be to buy his way into that market.
Spiegel now faces a similar challenge: identifying emerging markets and being willing to buy his way into them. The past two decades are littered with social platforms that gained momentum and then failed to innovate. Myspace. Digg. Friendster. Orkut. Whether Snapchat is destined to join them will depend on whether Spiegel can recognize that Snap needs to be more than just an app and some sunglasses. That pile of IPO cash won’t be there for long; he needs to start spending it.
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