Snapchat: Snapping Its Losing Streak
By: Faizaan Baig & Hirushan Thalayan
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Scrolling Through Snapchat’s Memories
Snapchat provides a unique user experience by prioritizing connection among its users. Through photo sharing, it encourages individual communication with streaks, “Best Friends,” and read receipts. Additionally, snaps sent by one individual to many are received by others as an individual message rather than as a group message, contributing to a feeling of personalization within the app. Since launching in 2011, Snapchat (owned by Snap Inc.) has become the sixth most popular social networking platform with 78 per cent of U.S. young adults aged 18 to 24 using the application.
Despite its popularity among teens and young adults, Snapchat saw a decrease of daily active users (DAU) in the second quarter of 2018, followed by a further decrease of two million DAUs in the subsequent quarter. Snap Inc. CEO, Evan Spiegel, attributed the decline to negative reception of its January 2018 redesign. However, year-over-year DAU growth in 2017 was already 30-per-cent lower than in 2016, suggesting a deeper problem.
Snapchat has been losing users to its main competitor, Instagram. Although Instagram’s “Stories” feature only launched in 2016, its user base has grown to double that of Snapchat’s. Snapchat’s inability to grow its DAUs is especially troublesome because of the company’s high cash burn rate, which has left it in a difficult financial position. In 2017, parent company Snap Inc. reported an annual cash burn rate of $800 million. Considering its cash position of $1.6 billion, Snapchat has approximately two years of runway before additional financing is required. The markets have acknowledged the challenges facing the company as Snap Inc.’s share price has dropped 60 per cent since the stock’s IPO in 2017. Given this poor performance and the company’s lack of profitability, raising financing would be difficult and expensive.
Resisting the Status Quo
Spiegel acknowledged the aforementioned issues in an internal memo to employees before outlining two strategic priorities: expanding into developing countries and shifting the company’s target market to an older, more lucrative demographic. However, these initiatives are unlikely to be a panacea, as they fail to solve Snap’s short-term cash flow concerns.
Even if Snap Inc. is successful in expanding to developing markets, the resulting user growth will likely not result in materially higher revenues in the near term. According to the company’s Q1 2018 report, the firm generates $2.10 in average revenue per user (ARPU) in North America, but only $0.58 in revenue per “Rest of World” (ROW) user. While the DAU growth driven by geographic expansion could be beneficial to Snap Inc. in the long term, the limited contribution of each individual user limits the strategy’s effectiveness in addressing short-term profitability and cash flow concerns.
Source: Snap Inc., Q1 2018 Earnings Report
Expansion into a new demographic is also difficult given the level of investment required for app redesign and the risk of alienating the existing user base. To increase its appeal to an older demographic, Snapchat would require significant design changes to make the application more user-friendly. Furthermore, Spiegel’s memo highlights the importance of marketing Snap as a communication mechanism rather than a social media app in implementing this target market change. Such a strategy risks jeopardizing Snap’s existing customer base, as evidenced by Facebook’s struggles. It is estimated that Facebook will lose two million users under the age of 24 in 2018 and can only sustain user growth due to rapid adoption among older users. The growth in older demographics may be driving younger users away, with 34 per cent of U.S. youth internet users now viewing Facebook as an app for “old people.” This suggests that the value of growing Snapchat’s presence among older users is not worth the depreciation of its brand among younger users.
Negative user growth combined with Snap Inc.’s cash needs suggest that the company must attend to its existing user base to reach profitability. As it currently stands, Snap Inc. is unlikely to reach the previously expected $1 billion in advertising revenue until 2020, with only 3.1 per cent of advertisers considering Snapchat an effective advertising platform, a meagre comparison to YouTube’s 78.8 per cent. Facebook and Google also dominate with a combined 56.8-per-cent share of the digital advertising market, while Snap Inc. holds only 1.0 per cent. Additionally, Snapchat’s ARPU of $1.21 in Q1 2018 paled in comparison to Facebook’s $5.53, further evidencing that its platform is considered less effective by digital advertisers. Although Snapchat’s advertising revenue is expected to grow, market share is only projected to reach 2.2 per cent by 2020. Therefore, Snap Inc. should consider alternative revenue sources to reduce exposure to competition and drive cash flow.
Major Key: Snapchat’s Strengths
Snapchat’s greatest strength is its penetration and user engagement among young users. Considered the leading social network among teens and young adults, Snapchat is used by 78 per cent of U.S. internet users between 18 and 24 years old. Younger users, commonly referred to as Generation Z, represent a coveted market, but one that is difficult to capture. Snap has a loyal base of Generation Z users, who will account for 40 per cent of U.S. consumers by 2020. Growth in an older demographic may not justify the potential loss of such valuable users, who serve as a true advantage for Snapchat.
Snapchat users stayed on the platform for an average of 49.5 minutes per day in June 2018, nearly double the July 2017 figure of 25.2 minutes per day. This serves as proof of Snapchat’s ability to make communication feel personal and authentic through its relationship-building features, which encourage users to remain engaged. Given that 90 per cent of individuals under the age of 35 value authenticity in brands, this is a competitive advantage that should be exploited. The personalized communication at scale creates an opportunity to bring users closer to otherwise “larger than life” influencers. The company can use its popularity among youth, high engagement with users, and perceived authenticity to offer consumers a desirable exclusive content subscription service. Such a premium subscription service, connecting users to individual influencers, could feasibly address the company’s immediate cash flow concerns.
Snapchat 2017 U.S. Penetration by Age
Source: Statista
Solution: The Paid Subscription Model
Social media networks with feature similarities to Snapchat, such as Facebook and Instagram, have yet to make premium content features widely available. However, analysis suggests that consumers would be willing to pay for premium or exclusive social media content. In 2011, 11 per cent of online users paid for premium content, spending an average of $10 per month. It is now estimated that a fifth of adults in developed countries will have 10 paid online media subscriptions by 2020, with an average spend of $100 per month. The overall premium subscription model has been increasingly successful in recent years, suggesting that this presents a lucrative opportunity for Snap Inc.
Rationale: Alignment with Snapchat
The paid subscription model aligns with the habits of Snapchat’s primary user base. 70 per cent of millennial households own a streaming subscription. That same demographic, along with slightly older millennials and Generation X consumers, shows a greater interest in spending on content on their smartphones instead of on TV. Trends indicate that Snapchat’s user base is increasingly willing to subscribe to exclusive content, with 43 per cent of 18- to 29-year-old Americans subscribing to premium internet content providers. Three trends further support this move.
Firstly, YouTube’s 2015 launch of YouTube Red (now YouTube Premium) demonstrated consumer interest in the paid premium subscription model and served to diversify the firm’s revenues away from advertising. This premium content service generated 1.5 million paying subscribers out of 2.5 million monthly active users in its four launch countries, generating at least $15 million in revenue per month.
Secondly, celebrity content applications indicate that there is a demand for exclusive influencer content. Whalerock Industries has created apps for celebrities such as Tyler, the Creator; Ellen DeGeneres; and the Kardashian- Jenner sisters. Kylie Jenner’s 2015 app, in particular, was downloaded 1.75 million times in its first week, with a 6-per-cent paid subscription conversion rate.
Finally, millennials want to support content creators. The recent success of the Twitch Partners Program shows that the millennial demographic is willing to support influencers. Twitch, an online game streaming platform, allows users to subscribe to individual streamers for exclusive chats, events, and “emotes”. The successes of YouTube Red, Whalerock, and Twitch Partners convey that Snapchat Premium has the potential to be a successful revenue generator for Snap Inc.
Integration: How Will It Work?
With the adoption of Snapchat Premium, users would have premium access to content, similar to Spotify Premium or YouTube Premium. However, the platform would differ in that the user would subscribe to specific influencers, rather than having access to all premium content at once. Influencers could opt to operate independently and rely on subscribers who pay for their content alone, or could form a group with similar content creators. Snapchat could also analyze subscription data through direct user “clustering,” which could be passed on to advertising partners, opening up another revenue stream long term. A premium account would allow fans to develop a closer, more personal connection with their favourite influencers. To execute this strategy, Snap Inc. will have to improve upon the influencer user base that it has struggled to build in the past.
In Austria, Germany, and Switzerland, Snapchat generated only a 6-per-cent share of influencer revenue compared to Instagram’s 34 per cent. The lack of interest in Snapchat as an influencer platform does not seem to be a result of the application’s core functionalities, since Instagram Stories are the most used tactic by Instagram influencer campaigns. The popularity of Instagram Stories suggests that Snapchat could be a platform used by influencers if it made an effort to attract such users, and ensured its design enables their content to be shared easily. To implement a paid subscription model predicated on influencers, Snap Inc. will have to bring influencers onto the platform.
New Snapchat Interface
Twitch Influencers
Snap Inc. should make an active effort to bring smaller influencers with loyal fan bases, such as Twitch streamers, onto the platform. A Snapchat Premium service would appeal to dedicated fans of creators looking for more personalized content from their favourite influencers. Twitch streamers would be able to create authentic behind-the-scenes and non-gaming content that could supplement their core streaming product.
Snapchat’s core users are teens and young adults, with 60 per cent of its users under the age of 24 as of 2016. 37 per cent of Twitch users are also within the same age group. Consumers aged 13 to 24 alone hold $500 billion in annual spending power. In addition, of the 666 million worldwide gaming viewers, Twitch captures 185 million. Each month, average eSports spending per consumer worldwide is $3.64, a figure expected to grow to $5.20 by 2020. Considering the lucrative nature of Twitch users and the overlap in demographics, Twitch influencers present a valuable opportunity to Snapchat. Snapchat Premium’s initial consumers would likely be gaming fans but as the service grows and additional influencer partnerships are created, the universe of interested individuals would broaden.
Snap Inc. should offer influencers a margin on the fees generated from subscribers, following Twitch’s model where partnered streamers can earn between 50 and 60 per cent of the $4.99 subscription cost. The adoption of a similar margin split and individual subscriptions would incentivize influencers to join the program. Alongside this compensation, simplifying the user interface and improving discoverability would prove integral in attracting influencers to the platform. There is also little risk associated with Twitch influencers joining Snapchat’s platform: the two platforms are different in the nature of content delivered, reducing the risk of cross-platform cannibalization.
A Featured Story
While user generation is a concern for Snap, achieving immediate cash flow takes priority. Snap Inc. is currently burning cash at an unsustainable rate and must diversify its revenues to survive. Through this opt-in premium subscription model, Snap Inc. can expect ARPU growth by targeting an attractive segment of its current user base, all while continuing its normal operations. In the long term, Snap Inc. will be able to expand this model to target other attractive segments. This will ultimately help sustain revenue growth and allow Snap Inc. to differentiate itself from fierce competitors like Instagram and Facebook.