Snapchat is selling out

The chips are down.
The chips are down.
Image: Reuters/Lucy Nicholson
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Snap, Snapchat’s parent company, posted an ugly earnings report Nov. 7.

The company has lost over $3 billion since it went public in March, and its stock has not traded above its IPO price since July. It’s dipping into its cash reserves, and its user growth is slowing to a crawl. In an effort to right the ship, founder and CEO Evan Spiegel announced in his remarks that the company will undergo some dramatic changes in the near future.

First, the company plans to continue selling more advertising programmatically, using automated auctions rather than tailor-made custom advertising that the company has relied on to date. This means that more advertisers will be able to bid on any given advertising slot on Snapchat, and as they don’t require human involvement, ads will be much cheaper. In effect, this means advertising on Snapchat may start to feel a lot more like what you see on Facebook or YouTube.

Spiegel also said that Snap plans to overhaul Snapchat’s design. This is partly because the app currently requires a strong data connection to run well and that’s hindering growth in developing nations, but the app is still quite hard to use. “One thing that we have heard over the years is that Snapchat is difficult to understand or hard to use, and our team has been working on responding to this feedback,” Speigel said. Snapchat has been notoriously difficult to understand as long as it’s been around. Its initial public offering filings even included a step-by-step guide on how to use the platform.

The announcement is an admission that to grow, Snapchat needs to stop being the exclusive, insidery app that’s beloved by teens and flabbergasts their parents. It needs to do what Facebook did years ago and become where bored middle-aged people can catch up with the friends and relatives while also seeing some ads and maybe clicking on them.

Which may also be why Tencent, the company behind the messaging app WeChat which dominates life in China, has taken a 12% stake in Snap today, Nov. 8. As Bloomberg points out, the Chinese company has has turned its chat apps into cash cows through a combination of engaging content, integrated services, and advertising. It could be trying to do the same for a company that has far wider reach in the US than Tencent currently has.

Spiegel also said that Snapchat will address one of the other main complaints levied against the company, that it’s too difficult to discover new content on the app. “We think that there is a big opportunity to surface some of this content in a personalized and more relevant way, while still maintaining the exploratory nature of our service,” he said.

Snapchat recently unveiled Snap Maps, a new way of discovering snaps posted at locations around the world and an updated search function that provides more information about businesses and snaps recorded there. The app has slowly started to provide more context and information from friends and business, and it’s difficult not to think of how much that sounds like Facebook in the early years of monetization. But do we need another Facebook, given the big blue app has over 2 billion users and is showing no signs of slowing down?

Finally, Spiegel said the company is considering how to bring original content creators into the Snapchat fold. Right now, anyone who has become anything that you could remotely consider a celebrity on Snapchat has done show through sheer force of will: You have to find their username on another platform, add them, and remember to check their stories each day. The only content you can subscribe to is the highly produced daily videos created by media companies (or Snapchat itself) in the Discover section of its app. Spiegel wants to change this:

We have historically neglected the creator community on Snapchat that creates and distributes public Stories for the broader Snapchat audience. In 2018, we are going to build more distribution and monetization opportunities for these creators in an effort to empower our creative community to express themselves to a larger audience and build a business with their creativity. Developing this ecosystem will allow artists to transition more easily from communicating with friends to creating Stories for a broader audience, monetizing their Stories, and potentially using our professional tools to create premium content.

That sounds like Spiegel wants to build, at best, a YouTube for Snapchat, or at worst, a Vine. Twitter shut down Vine last year—which had a vibrant community of independent creators and whose videos were watched by millions each month—because it couldn’t make the service profitable. YouTube, on the other hand, is a massive source of advertising revenue for Google, but it also employs countless people to manage its creator community and work with celebrities and advertisers to ensure they’re happy. Also, YouTube is owned by the company that provides Snapchat with its video-hosting services, which means it’s likely to always have lower costs.

All of these changes seem at odds with Snapchat’s conception: A fun, simple way to share messages between friends that you didn’t have to worry about anyone seeing. It’s grown, but now it’s not entirely clear that the company has confidence in itself. It’s redesigning its app, its audience, and its advertising model, all within a year of going public. But Spiegel seems ready to leap into the unknown.

“There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term, and we don’t yet know how the behavior of our community will change when they begin to use our updated application,” Spiegel said. “We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”