Snapchat Bends to Advertisers, Hopes Its Users Don’t Snap

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Snapchat ads 2017

Despite 178 million daily active users and a creative DNA, Snap Inc. is struggling in the shadow of Facebook and losing money as it tries to stave off the latter’s intrusions on its innovations.

Snap, the parent company of Snapchat, released disappointing earnings on November 8th which sent the stock down nearly 20%, including conceding that its $130/pair Spectacles smart glasses—while great at building buzz—were a failure from a business perspective. As CFO Drew Vallero told analysts,

Unfortunately, we misjudged strong early demand for Spectacles and purchased more inventory than we now anticipate being able to sell. As a result, we recorded a $39.9 million non-recurring expense primarily related to excess inventory and purchase commitment cancellations. Moving forward, we will continue to be in the market place with Spectacles and expect modest revenue from the product line.

The self-described “camera company” may want to reconsider its corporate description as a hardwire/devices company. Its core product, Snapchat, boasts more U.S. users aged between 12-24 than either Facebook or Instagram. The company co-founded six years ago by then 21 year-old Evan Spiegel as an ephemeral photo-sharing app, still personifies Spiegel’s original vision.

“It was the embodiment of Mr. Spiegel’s worldview about how the internet should work—temporary instead of permanent, private instead of public, candid instead of rehearsed,” said TechCrunch alum Billy Gallagher, who’s writing a book about the company’s history titled, How to Turn Down a Billion Dollars (a reference to Snapchat’s founders rejecting $3 billion from Facebook).

Now it’s listening to marketers as it refines its ad products (including programmatic) vs. its competitors. As Spiegel noted on last week’s earnings call, the investment in selling Snap Ads programmatically is starting to pay off in terms of usage, if not revenue—yet. Snap’s automated ad-buying system helped draw five times as many advertisers in Q3 but also drove down prices by 60 percent to an ad sales total of $208 million, below analyst expectations. Spiegel commented to analysts:

Our efforts at automation have gained traction very quickly this year, with 80% of Snap Ad impressions delivered programmatically in Q3, up from zero% one year ago. The speed of this transition surpassed our expectations, but has dramatically reduced pricing as advertisers move from direct sales to our unreserved auction. This has decreased CPMs [cost per thousand clicks] more than 60% year-over-year, which has made it harder to grow revenues at the rate we would have liked. I am grateful that this transition is nearly behind us, and look forward to the many advantages our programmatic auction brings to our advertising business in terms of scale and ROI.

Although CPMs have declined in the transition to programmatic, “the majority of our revenue growth has come from a dramatic increase in impressions,” Spiegel added. “This has been a good test for our business, because we are always concerned that an increase in ad load will negatively impact user engagement. Fortunately, we have seen user engagement continue to grow at a meaningful clip, with time spent, frequency of use, and Snap creation all increasing, while Snap Ad impressions have grown over 400% year-over-year. This increase in ad impressions combined with the simultaneous growth in user engagement bodes well for the long-term success of our advertising business. Of course, overall ad load remains very low, and we will continue to monitor user engagement as ad load increases over time.”

Part of the evolution of Snapchat includes an upcoming redesign that will replace the minimalist design that appealed to teens with a personalized feed with algorithms to surface relevant stories. Facebook, Instagram and Twitter have all embraced algorithms dictating what shows up in users’ feeds.

Audience Filters

Snapchat Ad Filters - Red Bull, NBA, Michael Kors

Snapchat is also offering brands and advertisers “audience filters,” a step up from geofilters, with targeting ability based on interests, daypart, age and gender. “This signals that Snapchat is willing to start to do more for advertisers,” said Aaron Goldman, CMO of 4C Insights, a Snapchat ads platform partner, to Ad Age. “Reaching someone when you know they’re at your store, that’s farming. Audience filters—that’s more like hunting.”

Snapchat Ad Filters

Quaker Oats worked on a campaign with Snapchat ads partner VaynerMedia. “What intrigues us most about Snapchat’s filters is the combination of paid and earned media delivery rolled seamlessly into a single ad unit,” Jon Morgenstern, VP of paid media st VaynerMedia, told Ad Age. “When you consider the earned impressions derived from Snapchatters sending out Snaps using the filters to their friends, in addition to the paid delivery costs, the effective CPMs paid can be extremely efficient.”

Snap Ads Context Cards

Context Cards

It also introduced Context Cards last month so advertisers can give more information to help close a sale. As Snap puts it, “The original vertical video ad now (comes) with attachments customized for your objectives.” Lionsgate was the first to use it in promotion for the release of Wonder, so users could swipe to a page with information on local show times to buy tickets.

“With the Context Cards update, Snapchat becomes more useful for advertisers that want to measure ROI and trigger a response, such as a click, website visit or direct purchase without a user ever leaving the app,” Mobile Marketer commented. “Now, advertisers can also drive and track their ad spend, which was previously a major deterrent of the platform.”

Spiegel said the cards are “the next generation” of its augmented reality products. “Context Cards provide a unique opportunity to translate what you see on the screen into action — whether online or in the world around you.”

Branded Content

Snapchat is also expanding its original content such as daily shows from CNN, The Update, and NBC News. ESPN is bringing SportsCenter to Snapchat with a twice-a-week show that will be three to five minutes in length, hosted by several ESPN personalities, including Katie Nolan, Elle Duncan, NBA commentator Cassidy Hubbarth, ESPN Radio host Jason Fitz and NFL Countdown reporter Jac Collinsworth.

Branded news shows are perfect for its audience as they “map onto the kinds of behavior that most Snapchatters have already, which is that they visit the app with high frequency on a daily basis, over 20 times a day,” said Sean Mills, Snap’s head of original content.

Growth Without Snapping

While it needs to sustain growth and revenue, it does so at the peril of turning off its core users. “Spiegel pledged to keep Snap’s core values intact while expanding its business,” the New York Times commented. “But growth often comes at the expense of experimentation, and Snap’s decision to become more like Facebook is a worrisome sign for people who care about preserving the internet’s quirky heterogeneity. Snapchat’s users were once offered something genuinely different, but it may be time for them to expect more of the same.”

Spiegel still “has grand, sweeping visions of the future,” Gallagher commented, but they can’t must not “death by a thousand paper cuts” for the user experience, Gallagher argues. Will pleasing brands and investors alienate fans? Will bending to advertisers snap Snap in half?

As Spiegel himself has said, “A social network acts against users’ interests when it needs to make money.”

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