Nearing Peak Snapchat?

I never like to count companies out entirely but data is data, and it tells interesting stories. Earlier in the year, it certainly felt as though there was a hype cycle around Snapchat. All of a sudden, it was in the media more and, anecdotally, people started seeing more and more friends and family who have tried it out. The data in the chart below shows the spike but also answers the question as to whether Snapchat’s hype and new user acquisition was sustainable. It would seem as though it was not. Not only has the growth in new user acquisition slowed to a halt but we also see signs of decline.

While I don’t have a firm conviction on this point, I currently believe Snapchat is more like Twitter than Facebook. Meaning, their potential market, given current strategy and focus, is simply not that large. Unfortunately, like Twitter, they are likely to IPO ex-user growth. Perhaps that is why reports like this show up which state they are focusing more on maximizing revenue per user. As this from the article points out:

Convincing investors of the value of its engaged users will be critically important. As management told the analysts, Snap is still an early stage business where short-term performance may be “lumpy” as it grows.

Engagement matters because Snap intends to focus on more technologically mature markets where it will look for ways to increase its average revenue per user, the people said. That’s a departure from social-media competitors.

As the chart highlights, at a global level, user growth has slowed and even dipped slightly in Q4. The chart above is from consumers who answered a survey on applications they use monthly. We have similar data which asked the question of which social media accounts you have an active account with and the data was in line with the chart above.

As Snapchat nears IPO, maximizing ARPU is the best angle. However, the concern here is it will be hard to take share as ad dollars shift from offline/TV to online if you are not a Google or Facebook company. This is where Snapchat’s biggest challenges lie. They don’t have the scale to truly take share with the advertising shift, but they do have a lock on Western millennials. That’s worth something, but we just aren’t sure exactly how much at this point.

From what we hear with advertisers, the ROI on their ad spend with Snapchat isn’t what they expected either. This was the same thing we heard about Facebook in its early days and one of the primary issues they had during their stock’s plummet and low value after their IPO. It took a while for advertisers to understand how to make the most of their ad spend on Facebook. That can certainly happen with Snapchat as well as they experiment on the service. The big challenge will be to scale beyond just Western millennials. I see no path beyond that at this point.

So, if they are happy with maximizing ARPU of around 150m, mostly millennial age consumers, then that is not a bad business. It just won’t be a big business overall until they figure out how to penetrate more of the mass market with their service.

With Facebook, we had every indication that it was a mass market, mainstream product. In nearly every country, and especially in emerging ones, Facebook was a dominant driver of getting online. In emerging markets, it was common for carriers to bundle Facebook into the data plans because it was such a driver to get people to purchase smartphones. The analogy I always used is for the emerging world; Facebook was like AOL for the developed world during the first Internet book. It was the thing that got people online and connected. Snapchat is not that thing and is very different in the type of customers it is capturing. There is also the real threat of Instagram, which I think is more threatening than many are admitting to Snapchat.

Like I said, I never like to count companies out, but right now my conviction is they are more like Twitter than Facebook which means the IPO could be very rocky, if not ugly.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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