Snap Inc., the parent company of social media darling and ephemeral content sharing app Snapchat, went public last week raising $3.4 billion for a total valuation of $34 billion. Investors seemed bullish despite many analysts sharing words of caution. As we saw with Twitter’s epic post-IPO fall from grace, a strong market start does not mean long-term corporate success. Just a few days in, we’re already seeing Snap’s share prices plummet.
While Snap is certainly forging a notable path in the market, I have concerns about how the IPO will affect the Snapchat platform in the long run. Taking a social media startup public can force the company into monetization before they may be ready for it. Facebook was much more advanced before its IPO and still had to immediately take significant steps to remain profitable and drive growth (ahem, limiting brands’ organic reach ring a bell?). Users ultimately adapted to Facebook’s heavy advertising strategy, but the $34 billion question is will the same work for Snapchat?
I have three reasons to believe the answer may be no.
- Snapchat’s core demographic is young with little spending power: Snap listed 158 million daily active users as of December 31 in their filings. That’s stronger than Twitter at IPO time in 2013 which reported 100 million. Even better, their core user demographic is dominated by oft-coveted Millennials. Snapchat lists their primary user base as 18-34, but most reports show strongest use in 13-24. Unfortunately, that 13-17 age bracket has little to no spending power and is generally less open to advertising. Just as concerning, Snapchat’s filings show user growth has slowed in the last two quarters. As the social media darling to the young consumer, if they can’t keep up with growth among the youngest users coming online, they’ll fail to grow.
- Snapchat may lose its ‘cool factor’ if they struggle to authentically integrate ads: Snapchat currently makes money by selling ads, geofilters and lenses to brands and publishers. Brands like Taco Bell, FOX and Gatorade have seen wild success with sponsored lenses as they provide a unique way to integrate with user content. However, the price tag on those lenses is cost prohibitive to the average advertiser and the creative requirements to build an authentic experience limit which brands the approach may work for. Plus, at the end of the day what business results do sponsored lenses drive beyond brand awareness? Facebook has made billions by selling results-driven ads to advertisers of all shapes and sizes. If 18-year-olds suddenly start seeing ads for their local dentist on Snapchat, will the platform start to lose that cool factor that made it so popular?
- Snapchat has yet to build anything that another platform can’t replicate: Snapchat innovated the idea of lenses, filters and stories. Unfortunately, Facebook’s Instagram essentially replicated those features and found great user success in the process. Since then, Facebook and Twitter added stickers to photos on the platforms and Messenger has lenses as well. If Snapchat R&D continues to create features that are immediately duplicated by another platform with more power, they’ll struggle to keep their unique position in the market.
While many outside of the marketing world are laughing at Snap’s first foray beyond Snapchat (a line of Snapchat-ready sunglasses called Spectacles), the move shows that Snap is willing to think beyond one app for more ways to make money.
Ultimately, Snap has an uphill battle ahead of them but I’m hopeful that this influx of cash will be put to good use in smart hires and sound business strategy. What do you think? Can Snapchat pull off the IPO of the decade and continue growing from here?