Snap, Inc. plans to file its initial public offering this spring. Investors are excited that the social media company is generating tons of cash and anticipate Snap's experiments with augmented reality will a have big payout.
There's reason to be excited about the future of Snap. Like many social media platforms, the messaging service struggled to generate revenue early but is now riding a skyrocketing revenue trajectory. In meetings with investors in early February, Snap, Inc told investors the company expects to generate nearly $1 billion in revenue this year, more than double the $404.5 million Snapchat made in 2016, and 20 times the revenue generated two years ago.
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The appeal of Snap for many users is that the messages disappear. This also makes it more challenging for the company to leverage user data for targeted advertising, like competitors Facebook and Twitter. Internet and mobile app users are notoriously fickle, casting doubt on Snap's durability.
In late 2016 the company pivoted and began distribution of Spectacles, stylish sunglasses with an integrated camera. As the business and consumer augmented reality market materializes Snap's strategic pivot could be pointed in a profitable direction. The augmented reality Spectacles are an extension of the Snap mobile application. Both the application and Spectacles allow users to capture and share ephemeral moments with friends, without the stress that can accompany canonical social media accounts like Facebook and Twitter. In other words, Snap is banking on fun.
Fun has tremendous potential. But fun is also amorphous and fleeting. Uncertainty about user retention and loyalty is high. A new survey by big data marketing firm Fluent indicates that many of Snap's customers see the platform as "just a fad" and are likely to bounce to "better" applications if their friends migrate too. Additionally, Instagram's aggressive moves to mimic popular Snap features has made a dent in the application's growth.
Snap's revenue model is fuzzy. The company makes some money from traditional advertising and branded content, but stickers and filters generate the lion's share of revenue as well as sparking concern about the company's future. Snap users can buy virtual items to include in photos, like sunglasses, funny beards, and superhero masks. The model was proven first by other messaging giants like China's Tencent. Today Snap users are content shelling out big bucks for virtual items, but retaining these users—and the novelty of microtransactions—will be a challenge.
Fluent's online survey of 3,327 adult Snap users in the United States was conducted on February 6th, 2016. The company used its in-house automated technology developed for enterprise media and advertising clients. The tech allows marketers to poll audiences on topics in real-time, then aggregate results in a cloud-based dashboard. Many of Fluent's clients are also Snap clients and spend millions on advertising each year. Respondents were selected at random, and the results carry a 95% confidence level with a margin of error of +/- 1.7%.
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About half of the survey respondents think Snap is "just a fad," and 62% percent indicated a willingness to migrate from the app to "something better." 63% of American adults between ages 18 - 24 use Snap, but the number drops to 40% for those in the 25 - 34 demographic. Due to their increased spending power, the latter demographic is particularly coveted by advertisers, said Fluent CMO Jordan Cohen, and Snap should be worried about non-millennial user attrition. "On the plus side," Cohen said, "66% of [poll] respondents think they'll be using the [mobile application] in five years. On the down side, [a large percentage] of users seem ready to bolt when something better comes out."
Like Twitter before it, Snap's brand recognition is high, but converting users remains a challenge. Engaged Snap users, however, are likely to remain highly engaged. 42% of users under 25 use the app "all the time," and an additional 22% percent use Snap "every day." Though according to the Fluent sample data older users are less likely to use the app, engaged users over 25 still check in weekly.
Advertising paired with entertainment and news content inside the Snap mobile app is slumping, Coen said. "While traditional media organizations have embraced the platform, the majority of users still don't follow news, sports, or entertainment accounts on Snap. 'Branded content' appears to be faring better with consumers on Instagram stories." And according to Fluent data, 69% of Snap mobile users skip ads "always" or "often."
The advertising and engagement numbers are informative, Cohen said, but not alarming. "To their credit, Snap does a great job of experimenting with and implementing new ideas," he said. "Their growth is huge and reminiscent of Twitter, Facebook, and Instagram." Cohen is confident the company's experimental culture is an asset and they'll eventually learn how to monetize and retain users. Whether the company can figure it out before 2017's IPO is still in doubt.
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Dan Patterson has nothing to disclose. He does not hold investments in the technology companies he covers.
Dan is a Senior Writer for TechRepublic. He covers cybersecurity and the intersection of technology, politics and government.