Snapchat’s evolution from sexting app to advertising darling, and how its record IPO will affect its ad business
Snapchat’s humble beginnings as ‘that sexting app’ are starting to look like ancient history now that its parent company Snap Inc has successfully engineered what is the biggest initial public offering for a technology company since Facebook. Where other online giants have seemed to race toward the stock market, Snap’s path has been far more measured for fear of it killing the golden goose that has been laying the eggs – its ephemerality.
The notoriously secretive company is now a publicly listed one and to mark the occasion The Drum explores its journey to date, asking whether it will emerge as a serious player in the digital arena or do a disappearing act?
Having been founded in 2011, Snapchat spent the first three years of its life without a robust commercial model, but co-founder and chief executive Evan Spiegel has always been adamant that ads on his platform should buck the digital trend and serve up formats that are native to the experience rather than “creepy”.
It’s not only the ad formats that have changed within Snapchat’s walls in recent years – the way the business works with agencies and brands to adopt them has also shifted. The upstart has now opened up its API to all advertisers and inked deals with creative and digital partners including Media Monks, Unit 9 and Stun Creative to produce content for the brands as well the publishers using its Discover platform. Where once the business was LA-centric, it has expanded the operations of its London base, saying the UK’s creative industries made for a “great place to build a global business”.
In comparison to other social networks, industry insiders believe Snapchat’s advertising is still quite tightly controlled, with users served smaller ad loads than they would be on Facebook. Yet, far from being a fad the app has come to change the way marketers approach mobile.
“The second was that Snapchat really introduced the idea of 'context collapse’ to social media, where content distributed can have an expiration point in time. This was a very important development for social media and content distribution as disciplines.”
Can Snapchat convince advertisers it's more than a place to experiment?
Momentum gathered behind Snapchat’s ads after it debunked several misconceptions about price, analytics, the evanescent nature of its audience and more last January. Addressing marketers at Advertising Week Europe three months later, the company’s head of content Nick Bell gave brands a clearer view of why they should give the app a slice of their budget. He explained that in comparison to the well-manicured propositions of its rivals, Snap believes itself to be “removing the pressure that social media had created,” with its instant nature and rough and ready feel. Bell also addressed criticisms that Snapchat’s ads were too pricey, pointing to less costly formats like Geofilters and claiming that improved targeting options had helped streamiline prices.
As these messages circulated the industry, marketers that had kept the platform at arm’s length were intrigued and approached their agencies with questions. Everyone from Adidas to Domino’s,Sony to Sainsbury’s has run campaigns on Snapchat, however some - like Asos - reported being left frustrated by a lack of measurement.
Toward the end of last year, comments from Sony highlighted the conflict faced by marketers when buying ads on the platform, with Sony Pictures' international digital marketing vice-president Aaron Wahle saying he wasn't “buying the place,” so much as “buying the person”. At the time, he lauded Snap’s psychographic approach, his praise running contrary to complaints from others that it was lagging behind its rivals.
Snap responded to such concerns with a flurry of metrics, some of which sought to give advertisers to power buy based on TV-style ratings. The ephemeral app has pitched itself to brands and investors alike as the new TV for millennials and through measurement deals with the likes of Nielsen is trying to appeal the channel's biggest spending brands.
Despite Snapchat's efforts to date, advertisers want its ad metrics audited by the media industry’s independent measurement watchdog the MRC, as reported by the WSJ, in order to justify giving it the big budgets usually reserved for TV, Facebook and Google.
“With my marketing technologist’s hat, I would love to see more from Snapchat in terms of APIs and the ability to collect data programmatically in a way that for content, analytics and services, which I am sure is coming, says Filippo Catalano, chief digital operations officer at Nestle. “It is moving there, but also it is focusing on what is enabling its growth at the moment."
Yes, advertisers like Nestle are tempted by the app’s vision for mobile TV but they’re struggling to understand what that pitch means for their own business and how to best activate it.
“Snapchat offers brands a real opportunity to piggyback the culture of innovative communications. Increasingly Facebook, Twitter and Instagram have devolved into the equivalent of banner ads - especially with younger users who view branded content on these platforms as an annoyance,” muses Marc Curtis, head of labs at TMW Unlimited.
“Snapchat recognises that a key part of its strategy centers around its ability to find new and engaging ways of enabling brands to talk to users without it looking like spam. Our creatives like Snapchat because it offers them the opportunity to create full screen, audio enabled content which doesn’t piss users off (assuming our creatives are doing their job) and our more youth focused brands like the platform since it indexes better for 18-24 year olds.”
Earlier this month, eMarketer unveiled mobile forecasts around Snapchat’s superheated user growth in the UK and US. The data predicts that by the end of 2017 Snapchat will boast 13.6 million mobile users in the UK, and claims that in the US as much as 10% of its audience is aged 45 and older. Cathy Boyle, principal analyst at eMarketer says she would be surprised if this trend of older audiences engaging with the app didn’t emerge in its other established markets. She says Snapchat is focused on younger consumers to build brand loyalty but also recognises that older demographic groups have substantial spending power.
The road to probability
In the short-term, Snapchat’s promise to investors is pinned on growth, rather than revenue.
A sense of trepidation remains among some marketers, but there’s no question that brands are earmarking chunks of their budget for Snapchat promotions. Sir Martin Sorrell noted that WPP clients spent $90m on the app last year – $60m more than it had predicted would be spent on the app in 2016.
Speaking at Mobile World Congress (MWC) ahead of Snapchat’s IPO, Sorrell said the platform could become a “threatening alternative,” to Facebook and the “third force” behind Mark Zuckerberg’s brainchild and Google.
Sorrell has, however, acknowledged that it “is a good example of a company that got $400m in revenue in a year but limited profitability,” with spend from WPP’s clients making up a little less than 25% of Snap’s revenue last year.
So could the upstart really become better placed to capture the budgets of its digital, and traditional, rivals following the IPO?
“Snapchat’s key USP for advertisers has been the differentiated consumer product, differentiated ad products, and the audience base profile,” asserts Bardega. “Facebook has done a very good job of ensuring that the consumer product is less differentiated now with various launches across Facebook and Instagram but the audience base and ad products are still very attractive to advertisers. Providing Snapchat can continue to grow, they will take an increasing share of advertisers' budgets.”
Boyle takes a slightly more cautious view, saying that if it wants to siphon these ad dollars it will have to create a more “TV-like environment.” She points to deals Snap has media with media companies - like Viacom and Bloomberg – as a sign the app is inviting brands to create slots to sit between immersive content.
Snap’s IPO echoes Facebook’s own in 2012 and yet one path the Snapchat won’t be following its peer on is in selecting which markets to expand to. Facebook has made no secret of the fact that it wants to bring the internet to developing markets with a particular focus on places like India, but so far Snap has been keen to plant its roots in more established regions.
Boyle puts this down to the “heaviness,” of the app, whereby users in less sophisticated markets may not have access to the cellular data or networks needed to support it.
“So there are challenges for Snapchat. If they want to expand into those markets they might want to create a lighter version of the app and from what I understand and my conversations with them – though it’s still early days – is that their top priority at this point is to focus instead on markets that have more sophisticated device use and greater penetration of those smartphones that are more contusive to their current app.”
Snap’s path towards profitability has yet to be carved out. Its revenue has shot up from $58m to $404m over the past four years, but its chiefly millennial audience are a fickle demographic meaning stickiness and the ability to provide a more TV-like experience in comparison to Facebook will be key.
Despite bulking up its ad business, the company’s net loss widened to $514.6m in 2016 from $372.9m the year before, and with Facebook, Instagram and WhatsApp emulating its stories feature it will have to delicately balance ad loads with user experience to deliver the growth it has promised investors. It’s focus on the US has helped prop up its business so far, but with other social apps spanning far and wide the company may have to shift gears in the future if it wants to snap up the audiences of its rivals.