Snap Inc. debuted on the New York Stock Exchange in early March. Its mobile app, called Snapchat, is popular among young social media users. Its IPO was greeted with a lot of attention.
Now, I’m an old-fashioned newspaper and Facebook guy, so Snapchat eludes me on a personal level. Nevertheless, there is a lot that can be learned from the company and its business model.
Snap’s IPO filing with the Securities and Exchange Commission offers a look into the company’s products, its users, and how it expects to make money in the future.
If you haven’t had the time to read this prospectus (it’s more than 200 pages). here are 10 of its most interesting revelations. The last one might surprise you.
Rightly or wrongly, I mix the names Snap and Snapchat freely. Go figure.
1. Snapchat is, and will continue to be, a company that sells advertising space.
In 2016, advertising sales accounted for 96% of its total revenue. In 2015, that number was 98%. The company draws a large audience through its free and engaging products, and then sells those eyeballs to advertisers.
2. Even so, Snap calls itself a camera company.
Snap’s prospectus opens with this statement:
“Snap is a camera company. We believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate. Our products empower people to express themselves, live in the moment, learn about the world, and have fun together.”
Since Snapchat is mainly dependant on the camera technology in mobile phones, this statement makes some sense.
On the other hand, Snap says it is competing with the “social media offerings of Apple, Facebook, Google, and Twitter.” Not Canon or Nikon.
3. The success of Snapchat depends on its ability to attract and engage users.
Snapchat has a big and growing audience. It measures its audience size in daily active users (DAU), as averaged over each calendar quarter. It finished the fourth quarter of 2016 with nearly 160 million DAU.
For comparison, Facebook had 1.23 billion DAU in December 2016.
4. Ad revenue is growing exponentially.
Whether measured in gross terms or in average revenue per users (ARPU), Snap’s ad revenue is growing — and growing fast.
In 2016, the company had revenues of more than US$400 million. That’s a six-fold increase from 2015. In the final quarter of 2016, ARPU was US$1.05, compared to US$0.31 for the same quarter in 2015.
5. Snap generates no content.
Instead, Snapchat relies on its users for content. This is identical to Google and Facebook, and, of course, is practically the opposite of newspapers, radio, and network television.
6. Snapchat’s users are young.
The majority of users are between 18 and 34 years old. This is what makes the platform so desirable to advertisers.
7. Snapchat is riding the mobile wave.
Mobile advertising is the fastest growing ad segment in the world. Worldwide mobile ad sales are expected to increase from US$66 billion in 2016 to nearly US$200 billion in 2020. Over that same period, the sum of non-mobile ad spending is expected to decrease.
Here is a key statement from the report: “... As time spent on mobile grows, and especially as people spend more time watching videos on mobile, advertisers can transfer their traditional media advertising spend to mobile to make up for that lost reach and frequency.”
8. Snapchat’s consumer and ad development teams are one and the same.
There is no “church and state” at Snap. Instead, the developers and the product managers responsible for devising and developing consumer products are also responsible for advertising products.
From the report: “... We can take the things we learn while creating our consumer products and apply them to building innovative and engaging advertising products that feel familiar to our community.”
This is a sensible approach for a company that relies on the marriage of consumers and marketers.
9. This is not a capital-intensive business.
Unlike news media companies that require big upfront investments in printing presses, Snap boasts that it has little need for large capital expenditures. The company says: “We use third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue-generating activities.”
From an operating perspective, it should be easy for Snap to dial down its expenses. On the other hand, the barrier to entry is low. It may not be long before the next new platform attracts social media users.
10. Snapchat will let you know when there is something caught in your teeth.
Snapchat calls its team “kind, smart, and creative.”
From the report: “… We mean the type of kindness that compels you to let someone know that they have something stuck in their teeth even though it’s a little awkward.”
Whether you use Snapchat or not, this company is already shaking up the media world. Expect to hear lots more about Snap and Snapchat in the coming year.