Snap Inc., the parent company of the millennial-loved Snapchat app and makers of camera-equipped sunglasses, Spectacles, recently filed paperwork for an initial public offering, targeting a valuation between $20 billion and $25 billion. With a coveted core base — the app claims to reach 41% of all 18- to 34-year-olds in the U.S. on a given day — and a business model matching the advertising industry’s ongoing shift to mobile, the five-year-old company remains a media darling in an environment dearth of other significant offerings.
Snap wants to raise at least $3 billion, but it has yet to turn the kind of profit that justifies such an expensive offering. Closer inspection on the company’s revenue sources, losses, competition and stagnating growth rates shows that despite the attention, the company might present challenges to investors — and publishers who are investing time and money in the platform. The company lost $514.6 million in 2016 and has warned prospective shareholders that it “may never achieve or maintain profitability.”
The Pluses for Snap — and Publishers
But Snapchat has certainly made hay with its walled garden, Discover, showcasing content from premium publishers eager to get daily content in front of that juicy core audience. And the New York Times recently signed on to deliver its Morning Brief for Discover, citing Snapchat as the “ideal place” to deliver “smart, visual digital journalism” to younger audiences. According to new research from eMarketer, nearly half of Snapchat’s revenues last year — 43%, to be precise — came from ads on Discover.
Unlike the 30-second standard ads for television commercials, or even YouTube’s 15- or 30-second pre-roll ads, the quick and easy 10-second spots on Discover are just right for an audience used to on-demand television. And advertisers must tailor their creative to the audience, in order to drive swipes and attention. Plus, eMarketer projects that Snapchat’s total revenues will more than double in 2017, from $348 million to $804 million, while the company says it is aiming for $1 billion in revenues this year.
The Downfalls for Publishers
That’s great for Snap but not so hot for most publishers, who have received little more than tepid gains from their work on Snapchat, according to research from Digital Content Next. DCN found that their members surveyed reaped the least revenues from Snapchat in the first half of 2016 — $192,819 per publisher, compared to $773,567 earned on YouTube, $560,144 from Facebook and $482,788 on Twitter. DCN publishers also cited Snapchat as the most difficult company to work with.
While Snapchat has alluded to future offerings of better metrics for advertisers, and announced a pay-up-front licensing model that may help publishers monetize on Discover more effectively — a model akin to what TV networks use when purchasing programming — that’s not exactly a foolproof profit plan, at least not yet. While Snapchat has managed to avoid the onslaught of fake news that’s polluted other platforms, publishers would be right to continue to be wary of giving complete control to the platform — even a hot one like Snapchat with a lock (for now) on millennials.
The Stresses of Being a Hot Commodity
Of course, Snapchat’s biggest rival, Facebook, isn’t standing still. Like Snapchat, Facebook also wants to be the next TV, and a much more visual network. From Instagram Stories to tests of disappearing messages on Messenger, Facebook hasn’t been discreet about cloning Snapchat, and this intense competition may prove difficult for the upstart in the long run. (Note that Snap rejected a $3 billion buyout offer from Facebook previously.)
In its prospectus, Snapchat cited “increased competition” as one of the key reasons user growth slowed considerably at the end of last year, a trend that prompted comparisons to Twitter — another company with a hot IPO that’s failed to attract new users and growth. And unlike Facebook — which has grown to be the most powerful network in countries like India, where mobile connectivity is the de-facto way users access the Internet — Snapchat’s reliance on strong mobile infrastructure and cheap bandwidth costs means that its international growth is limited. It also faces competition from regional apps like Asia’s Snow.
Then there’s the concern that Snapchat will fail to reach users over the age of 30, whereas Facebook has proved to be friendly for multiple generations. Better ad targeting and deeper engagement, therefore, is crucial for Snapchat. But it’s running neck-and-neck with Instagram when it comes to being an important network for teens, according to a fall 2016 survey by Piper Jaffray, with 80% of teens using Snapchat to 79% opting for Instagram. Not only that, but one in three users on both Instagram and Snapchat said they hardly noticed the ads on their platform of choice, according to eMarketer.
Snap certainly has some tall orders to fill if it wants to match its valuation hype, as the buzz builds around its IPO. Publishers, especially magazine and digital native outlets, will continue to shower attention on Snapchat and get a payoff, but for the platform to really reach beyond its core millennials, that will take more time and investment.