Despite Snap’s (the parent company of Snapchat) strong performance on the stock market following its IPO last week, serious questions linger about its future. Its $28 billion valuation can be credited to its large, demographically attractive user base and status as a disruptor in the social media space. However, investors seem to be wavering. Snap’s shares dropped below its post-IPO price on Monday and continued to fall on Tuesday. Five of seven analysts covering the company have released a ‘sell’ recommendation for the stock. Indeed, Snap will probably need to disrupt itself to survive.
The main challenge with Snapchat is the service itself, which ironically, made it popular in the first place. People use Snapchat because it is disposable. Send it and it disappears. It operates with the attention span of today’s youth (i.e. very little), and is popular largely because it is simple and fast – a quick social hit. Users don’t need to scroll though masses of irrelevant updates and holiday pictures to get to the really interesting stuff. There are no touched-up profile pictures or detailed personal descriptions. This makes the service fun to use, but it also makes it a disaster for advertisers.
People don’t go to Snapchat to search for information (like Google); to find a job (like LinkedIn); to deeply engage with friends (like Facebook); or to buy stuff (like Amazon and Alibaba). Its medium, much like Twitter, is inherently poorly designed to support advertising. If that wasn’t bad enough, Snap knows much less about its user base than competitors, like Facebook, We Chat, or Google, who are able to very precisely segment users and provide this information to advertisers. Today, at least, there are no obvious sources of revenue or profit beyond advertising.
It will be difficult for Snapchat to occupy the social media space for long. Its concept is relatively easy to imitate, with many competitors, like Facebook with Instagram Stories, We Chat, and others, already offering copycat products. What is more, these competitors have other lines of profitable business that can subsidize their attacks on Snapchat. By contrast, Snapchat, at least today, is a one-trick pony.
Then, there is Snapchat’s user base. Its youthful users are notoriously fickle and disloyal, and switching costs to move to another platform are relatively low. Remember Vine, Yik Yak and MySpace? They were all social media networking tools that couldn’t make their platforms last.
Today, the business landscape is full of digital disruption, which is unpredictable and complex. The Digital Vortex is the driving force behind that disruption. A real vortex (i.e., tornado) violently draws everything towards its center. In the Digital Vortex, entire industries are pulled toward a “digital center” in which business models, offerings and value chains are digitized to the maximum extent possible.
How can Snap continue to compete in this landscape, especially with pressure to show revenue and profit now that it’s a public company? Snap earned an average of $2.70 per user in 2016, the year before it went public. By contrast, Facebook earned nearly double Snap’s rate a year before it went public in 2011 at an average of $5.11. This will need to increase. For example, the company will need to leverage the success of its wildly popular filters feature through increased sponsorship revenue. It will need to add advertising in a way that doesn’t annoy its user base, who have become accustomed to a clutter-free interface. At the same time, it will need to guard the privacy of its users. After all, it is only one big breach away from disaster. Imagine if some of those supposedly vanished images show up online?
When companies are caught up in this Digital Vortex, they break up and recombine. It is hard to define, for example, what industry Amazon is in today. Snap will probably have to look beyond its core focus on disappearing photos and video. It is starting to do this, partnering with television programs for mini “shows.” However, these types of deals only made up about 14% of its revenue in 2016, according to Recode.
All in all, it is a tall order for Snap to translate its large user base into a profitable and sustainable business. The company even acknowledged in its IPO filings that it may never reach profitability. So, if you’re looking for a quick hit, you might want to invest in Snap. But, if you’re looking for anything more than a few months, you’d probably want to stay away – unless we start to see some changes in Snap’s business model.
Michael Wade is director of the Global Center for Digital Business Transformation and professor of Innovation and Strategy at IMD. He is also co-author of the book, Digital Vortex: How Today's Market Leaders Can Beat Disruptive Competitors at Their Own Game.