Snap has a minor dip but can it learn Facebook's lessons?

Snap has reported its numbers for the second quarter, and while the news is not wall-to-wall blockbusters, there does seem to be rational, long-term confidence.

For the first six months of 2018 Snap brought in total revenues of $492.9 million, up 49% year-on-year, while the net loss narrowed from $2.6 billion to $739 million. This might weigh heavily on the spreadsheets, but it wasn’t too long ago Facebook was also haemorrhaging cash. The walled garden business model takes time to develop, and Snap is heading in the right direction after years of looking like nothing more than an expensive procrastination tool for teenagers.

“I’m really excited about the progress we’ve been making at Snap, and optimistic about the opportunities ahead as we continue to improve our team, reinforce our culture and invest in innovation,” said CEO Evan Spiegal. “We have focused a lot of our time and effort this past year on developing our team, culture and leadership that we need to rapidly scale our business.”

Perhaps the most worrying sign from the announcement is the Daily Active Users (DAUs). This number increased 8% to 188 million in Q2 2018, compared to 173 million in the same period of 2017, though it was down 2%, three million users, sequentially. Trends are heading the right direction year-on-year, so this might be nothing more than a blotch on a single page in the story, at least that it what Spiegal believes. Most importantly, investors seem to buy the explanation as share price barely moved.

The dip has been blamed on the redesign launched by the team earlier this year, which was not received on the best of terms by users. This was not a successful initiative by the team, and disastrous feedback led to a complete rethink. Spiegal highlighted the main frustrations have been addressed and corrected. It was a necessary move though, it took the users from engaging exclusively with friends to introduce ‘publisher stories’, and the most turbulent waves to seem to be in the past.

Aside from innovative partnerships, this does seem to be one of the growth factors. In terms of monetization, it is one of the simplest routes to market. It might not be the blockbuster display advertising which Facebook and other social media platforms are used to, but it is a more engaging way to monetize the user base. The number of users who watch publisher stories every day has grown by 15% over the course of 2018, partly fuelling the 35% increase in ARPU to $1.40.

The ARPU statistic is an interesting one here. $1.40 is not the end of the world, though it is quite a bit down on Facebook’s worldwide average of $5.97 and significantly shorter on the $25.91 it makes from users in the US and Canada. The next couple of quarters might give an indication of what type of platform Snapchat will eventually become.

Facebook is the master of monetizing the walled garden business model, though it has come at the expense of engagement recently. The reason younger generations are favouring platforms such as Snapchat and Instagram over Facebook is because of how much commercial activity there is. Facebook got greedy and it has been affecting the future prospects of the business as user growth in key Western markets stalls due to a declining experience on the platform.

Snap has to learn a lesson here. Making the platform overly commercialised, like Facebook has become, will be good for the spreadsheets for the next couple of quarters but the long-term impact could be detrimental. Once you lose the interest of the user, it will be tough to regain; there are plenty of other options on the internet to keep them busy.

Fortunately, Snap does seemed to have developed a solid culture of innovation. The short form videos are performing very effectively, 11 ‘Shows’ reached a monthly audience of over 10 million users, up from 7 in Q1 2018, while other features have been copied by competitors. The mentality does seem to develop new ideas with entertainment in mind, not direct monetization. Cash will come as long as you keep the users busy in the garden.

Users will define the prospects of the business and engagement will have to be maintained. Should Snap be able to keep greedy investors at bay, not sweating advertising revenues out of the user too intensely, this will certainly be a company in the money.