February 08, 2017

Snap Inc. - Snapchat's Challenges and Opportunities

By Michael Foster
Snap's recent S-1 filing illustrates several key challenges the company must overcome for Snapchat to live up to its promise and avoid becoming another Twitter.

Snapchat's parent company Snap Inc.’s long-awaited S-1, released Thursday, Feb. 2, contains few surprises. It shows Snapchat is clearly in hyper-growth mode as it gains new users and advertising revenue -- far more than Twitter Inc., for instance, which was already beginning to level off in growth before the firm’s IPO.

Snapchat’s advertising revenue in particular accelerated dramatically between 1H16 (when Snapchat generated $110 million) and 2H16, a six-month period when advertising revenue more than doubled sequentially to $294 million, bringing full-year 2016 revenue to $404 million, above most earlier public estimates.

Beyond these positives, however, the S-1 illustrates two key challenges that have surfaced in OTR interviews with social media and online video buyers during the past year. First, Snap acknowledges most advertisers only see Snapchat as an experimental area of spending from test budgets and that few advertisers have long-term commitments to advertise on Snapchat yet. Second, Snapchat sees competitive risks from Facebook Inc.’s Instagram, among other social media sites, which means the mobile app needs to keep users engaged to make more advertising inventory possible and collect substantial data to ensure that inventory outperforms. While these issues are both an opportunity and a risk, they nonetheless underscore the potentially daunting job ahead for the company in attempting to become the kind of mega-digital platform on which Snapchat is basing its future prospects.

To overcome these hurdles, Snapchat needs to make several improvements to its technology and marketing. The platform needs to become more robust and scalable for advertisers of all stripes, and Snapchat needs to help advertisers understand how it fits relative to their current TV, social media, and online video advertising efforts.

Fortunately, Snapchat has the potential to tap into these budget pools on a more dedicated basis in the future, just as these budgets are likely to get far bigger in coming years. OTR has consistently tracked online video yy growth in the mid-double digits (35%-55%) for several quarters, with all signs pointing to growth sustaining at the lower half of that range for some time to come. Social media, likewise, is strongly positioned for solidly double-digit yy growth in 2017 and likely well beyond, according to our sources.

Snapchat may have room to gain some share from weaker players in these sectors, such as Twitter or programmatic video DSPs, even if Alphabet Inc.’s Google and Facebook are strongly positioned to remain the behemoths. The key question is whether Snapchat can go beyond that low-hanging fruit. So far, OTR sources remain uncertain but are watching the company’s progress eagerly just as potential investors pour over Snap’s financials.

Specifically, OTR sources are asking:

  1. What data can Snapchat gather from users and how will this improve campaign ROI?
  2. Will Snapchat offer more scale, particularly into more demographic groups?
  3. Will Snapchat users remain engaged in both the platform’s content and advertisements?

Can Snapchat advertisements eventually replace campaigns on TV as well as other online video and social media platforms, or will they be a secondary complement to those platforms?

In coming notes, OTR plans to track how well the company is addressing these crucial questions and gaining the support and spending of advertising agencies in the United States.

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OTR Snapshots are direct feeds from our editors expressing their views on key issues and events in their industries, within and beyond our core coverage. Snapshots feature industry insights, source commentary, and general observations.