ARPU: Why Snap Inc will be a bigger disappointment to IPO investors than Twitter or GroupOn
Snap Inc, the company behind Snapchat, recently had an IPO with its current market valuation is about $25B. This is particularly interesting given Twitter which has more users, more growth prospects and a better advertising-based revenue model is valued at less than half that.
Since Snapchat is an advertising based business, it is quite straightforward to benchmark the potential of their business given we have lots of precedent from companies like Google, Twitter, Facebook, etc.
The value of an advertising based service is a function of its number of users, how much time they spend using the service, and how relevant these ads are to the users & the users to advertisers.
For Snapchat to be valued at 2x Twitter it implies the market thinks Snapchat will be 2x better than Twitter along one or more of these metrics. This seems like a strong combination of wishful thinking and believing in alternative facts
Number of users
Snapchat hovered around 158 million daily active users last year with growth slowing significantly with the launch of Instagram Stories. In addition they’ve effectively stopped growing outside the US & Europe. Twitter reported about 313 million monthly active users. It is interesting to note that Snapchat refuses to disclose its monthly active user numbers while Twitter refuses to disclose its daily active user numbers. However Facebook discloses both DAU & MAU which are 1.2 billion & 1.8 billion respectively. Assuming Snapchat has a similarly highly engaged user base then its active users are about the same as Twitter’s. This is consistent with metrics from Business Insider which pegs both services as having about 300 million monthly active users .
So it looks like Snapchat has about the same number of users as Twitter and user growth is slowing.
How much time users spend in Snapchat
According to their filing a typical daily user spends about 25–30 minutes in the app. This actually compares very favorably against Twitter whose users tend to spend about 6 minutes or so per day in the app.
This comparison does get tricky when considering how often end users see ads in either app. For Twitter, the primary feature end users interact with is the timeline which is a very natural surface for showing lots of ads. Snapchat shows ads in between stories from brands or your friends but it is far easier to jump in and out of using Snapchat without seeing any ads than you can in Twitter.
That said, Snapchat wins on user engagement and time in app. Now does this make it worth 2x of Twitter? That takes us to our next point.
How relevant are the ads on Snapchat?
My background is being part of the team that turned around Microsoft Bing’s business from losing billions of dollars a year to being a profitable business for Microsoft. Two things are very important for a digital advertising business
- Making sure ads are extremely relevant to end users
- Making it easy for advertisers to reuse existing creative assets from other platforms to reduce friction in them spending money with you.
Snapchat fails at both relative to the big advertising players it competes with for video ads; Facebook/Instagram and Google/YouTube. Both of these services have lots of ways to ensure the ads you see are extremely relevant to you. Facebook knows what brands & content you like, what websites you visit (thanks to Facebook Like buttons) and often merges in data from offline sources like credit agencies and data management platforms to build a profile of you. Google knows what you search for, what sites you visit (thanks to Chrome & Android) and what email you get.
All of these create a very rich profile to show hyper targeted ads. Twitter similarly has rich sources of targeting data from looking at the content of your tweets & retweets, who you follow, sites you visit that have tweet buttons as well as merging data from offline sources.
Snapchat on its own does not have a similar unique source of targeting data since there isn’t really much you can extract from user behavior on the service as you can on Facebook, Google or Twitter. They have similarly partnered with an offline data source (i.e. Oracle’s Data Cloud formerly DataLogix) to allow advertisers to target users based on offline data matched to their phone numbers or mobile device ID but this clearly table stakes relative to its competitors.
Another challenge for Snapchat is that video content is primarily vertical in the app. This means that advertisers can’t simply reuse their existing horizontal video ads that they run on TV, YouTube and Facebook to reuse on Snapchat. Although you can create vertical video ads, they are extremely disruptive since they require the user to rotate their phone in-between stories to consume the ad. Thus it’s no surprise that on Snapchat a vertical video ad may end up getting viewed nine times more than a horizontal ad.
That means to get the most out of Snapchat, advertisers have to do special work and can’t just reuse their existing assets they’ve created for TV, YouTube, etc to advertisers. This friction means they will see fewer ads from advertisers than their competitors do and will always be leaving money on the table.
In Conclusion
It’s hard to imagine how anyone familiar with the digital advertising business would value Snapchat at twice Twitter. It’s thus unsurprising that a key Snapchat ad exec who was poached from Facebook to accelerate their digital advertising business left the company even before the IPO.
Snapchat’s growth has slowed significantly and by the nature of it’s service will struggle to make as much money from users as competitors because it simply knows less about its users and has an ad format that is unfriendly to advertisers.
On a positive note, just like with GroupOn & Twitter, Silicon Valley investors have made a boat load of money from Snap Inc even if people who got in at the IPO may not. So I guess that’s something. I guess.
