Just How Screwed Is Snapchat?

Just How Screwed Is Snapchat?

Snap is screwed. Following an earnings call on Tuesday, a fifth of the company’s value disappeared in after-hours trading, Mark Zuckerberg is eating its lunch, Snap Spectacles are in the toilet. Yes, things are bad. But are they Vine-levels of bad? Or Twitter-bad? Trick question, Twitter’s very screwed!

Image Source: Snapchat

[referenced url=”https://gizmodo.com.au/2017/10/it-sounds-like-snap-spectacles-turned-into-a-massive-boondoggle/” thumb=”https://i.kinja-img.com/gawker-media/image/upload/t_ku-large/haxbsjjif7otarzmoa9q.png” title=”It Sounds Like Snap Spectacles Turned Into A Massive Boondoggle” excerpt=”This is kind of a sad story. In November, Snap Inc blew everybody’s mind by releasing a surprisingly interesting piece of hardware. The camera-equipped sunglasses called Spectacles worked with Snapchat and looked cool. But a year later, the company reportedly has ‘hundreds of thousands’ of unsold Spectacles sitting in warehouses in China. It’s unclear if any of them will ever see the light of day.”]

It’s only been eight months since Snap went public and one of the few successes it has to show for itself is a dancing AR hot dog. At the time of its IPO, Wall Street was bullish on the company that primarily targets fickle young people through its messaging and photo-sharing services. Investors ignored the fact that its annual losses exceeded its revenue and bought into the idea that the kids’ preferred platform was going to be a juggernaut because just think how much longer those kids will be alive. They will all be snapping pics of their breakfast for decades to come, and more people will jump on, and Facebook-levels of growth will inevitably ensue.

That hasn’t worked out. And it probably never will. It takes time to grow this sort of business. And when Facebook is showing off unreal, 47 per cent revenue increases year-over-year, investors’ expectations for social networks are rising higher than ever. Snap’s third quarter was expected to bring in $US237 million ($309 million) of revenue, but it fell short by 12 per cent. For its third-quarter earnings, the company reported a $US443 million ($577 million) net loss. To put that in perspective, in the whole year of 2016, the company lost $US514.6 million ($670 million). Snap lost almost all of that in a fraction of the time.

One stand-out number from Snap’s disastrous earnings was the disclosure that it lost $US39.9 million ($52 million) on its Spectacles camera sunglasses. Not only is that a lot of money to pay for storing unwanted devices and supplier order cancellation charges, but it helps cement the fact that Snap’s biggest initiative to diversify its business was a huge failure. Because social media is so competitive at the moment, other revenue streams are essential for Snap to convince investors that it has short-term potential. Hope for Spectacles should be considered as good as dead.

On the subject of competition, we’re primarily talking about Mark Zuckerberg. The Facebook founder tried to buy Snapchat four years ago for $US3 billion ($4 billion), but I can only assume Snap CEO Evan Spiegel has seen The Social Network and he knew that’s not what Zuck would do in his position. Since then, Zuckerberg has tacked just about every feature Snapchat has to offer onto Instagram. Instagram reported 500 million daily active users in September. Snapchat currently has 178 million daily active users and it added a paltry 4.5 million new ones this quarter.

On top of that, in its prepared remarks, Snap informed investors that it’s temporarily undercutting itself with its new automated ad auction service. Five times as many advertisers used the new system that awards ad placement to the highest bidder rather than going through a sales agent. Snapchat wants people to use this system, so its adoption was painted as a good thing, but Spiegel wrote that “our auction has a lower price-point than our reserved business because there is no fixed rate card”. That’s led to CPMs dropping “more than 60 per cent year-over-year”. But the CEO is sure that will all work itself out as more advertisers compete for buys.

The biggest fix on the docket for Snap is a redesign of its seriously confusing app. Young users are great for attracting advertisers, but if you need growth you have to bring in the olds. Those people don’t know what the hell is going on when they open Snapchat. Twitter has had a similar problem and it’s made many changes to its design in order to make itself more user-friendly. How’s that working out? In the second quarter of 2017, Twitter added zero new users. Yet during the third quarter, Twitter added two million new users.

Snap did add a dancing hamburger to its app last week, but we won’t know what kind of boost that gives it until next quarter.

Another potential ray of sunshine just before this earnings announcement was the news that the Chinese tech giant Tencent quietly picked up a significant stake in Snap, bringing its ownership to 12 per cent. Among its many holdings, Tencent owns WeChat and the Chinese microblogging platform Weibo. It’s a big company with plenty of money to keep Snap going if it wanted to go all in and fend off Facebook. That has to come as a bittersweet comfort for Snap’s CEO. Back in 2014, at the height of his hubris, Spiegel turned down an investment deal with Tencent after he demanded a $US4 billion ($5 billion) valuation. The firm was reportedly “offended by the terms”. Now, one of the best sources of security at Snap is the potential that if all goes wrong, maybe Tencent will be interested in purchasing the company.

All in all, things are bleak around the house that dick pics built. It’s too easy for competitors to steal its ideas, it’s too hard to get into hardware, it’s arguably mishandling its advertising, and it doesn’t seem to have any big, new ideas. Yeah, Snap is really screwed.

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