Snapchat is not a social network and other things we learned from its IPO filing

Since Snap filed for its IPO last week, I've been pouring over its S1, the document revealing its business, which makes for very interesting reading. It contains a mixture of great stats detailing impressive user engagement, and not so great stats slowing user growth. These are my in-depth takeaways:

Snapchat is not a social network

Snap Inc is a camera company.

“In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones.”

This confirmed my initial feelings around what I’ve been saying for a very long time: Snapchat never set out to be a social network. Therefore, it is deeply unfair to compare Snapchat to Facebook or Instagram in terms of users or growth rate. Its S1 shows stats on its latest acquisitions, including the mobile search startup, Vurb, which will enable people to do more than just send pictures. Its whole idea is to use the camera to become the gateway to the world.

This creates a problem for investors, however, in that there are not that many reference points currently on the market. The closest hot camera company is GoPro, and even that isn't doing so well at the moment, so this might spell bad news for Snapchat. Nevertheless, it could be argued that this spells out exciting investment opportunities, in that entering unchartered territories means it could either blow up (if it doesn't blow out).

Better metrics

When we talk to brands, one of their biggest concerns is the data and analytics behind campaigns. Snapchat currently partners with third-party analytics providers to calculate metrics, however as it mentions in its S1, "today we rely primarily on our analytics platform that we developed and operate".

This is great news for brands and agencies as it provides greater accountability and measurability into campaigns, enabling them to reach their audience in a much more targeted, calculated way. For investors, this is equally good news as it hints at a self-service offering which Snapchat will be able to provide and thus let it reach even wider numbers of brands.

Snapchat is not going to get as big as Facebook

There’s an interesting excerpt in the S1, which hints at the future potential of Snapchat.

“If foreign governments think we are violating their laws, or for other reasons, they may seek to restrict access to Snapchat, which would give our competitors an opportunity to penetrate geographic markets that we cannot access...for example, we have very limited access to the China market, as we have not yet established an operating presence in China to support Snapchat. Access to Google, which currently powers our infrastructure, is restricted in China.”

The above will be cause for concern for investors. After the US, China happens to be the second biggest market for advertising, and not being able to reach that audience will be a problem for Snapchat. It’s also interesting to note that it has committed a further $2bn to Google, rather than just going forward and building its own infrastructure.

However, this is where things get a little murky as Snapchat say “we are currently negotiating an agreement with another cloud provider for redundant infrastructure support of our business operations. In the future, we may invest in building our own infrastructure to better serve our customers”. So on the one hand, it has committed $2bn for cloud infrastructure opportunities and yet is also looking for other potential partners – hmmm.

An interesting thing here was this admission by Snapchat about its scale:

"...in addition, because our products typically require high bandwidth data capabilities, the majority of our users live in countries with high-end mobile device penetration and high bandwidth capacity cellular networks with large coverage areas. We therefore do not expect to experience rapid user growth or engagement in countries with low smartphone penetration even if such countries have well-established and high bandwidth capacity cellular networks.”

Snapchat also made very clear its focus on being for the iPhone as opposed to Android, citing “although our products work with Android mobile devices, we have prioritised development of our products to operate with iOS operating systems rather than smartphones with Android operating systems”.

This is pretty interesting, because it suggests to some extent that Snapchat recognises that it might not be as huge as Facebook or Instagram, but it is not trying to be. To Snapchat, it is not a social network.

I don’t think this limit in audience impacts users that much. For instance, it is debatable whether the all-inclusive nature of audiences on Facebook or Instagram enhances the user’s experience significantly. The focus on iPhone, however, may be an issue; it is possible that Android users may feel as if they are missing out since iPhone users get much better experiences and earlier updates.

Snapchat's daily user growth has slowed

As the graph shows here, Snapchat averaged around 122 million daily active users, growing 14% in Q1, in 2016, then expanding at 17.2% growth rate in Q2 to 143 million daily active users. At this point, daily active user growth slowed to 7% and 3.2% in consecutive quarters.

Snap said one of the major reasons for this was “technical issues that diminished the performance of the application", however it couldn’t avoid referencing the impact of Instagram stories on its performance (Instagram’s Snapchat clone) stating, “our competition may mimic our products and therefore harm our user engagement and growth”. It is no coincidence that growth started to stagnate at the same time Instagram brought out its similar product.

In some roundabout way, I believe this to be good for users. Snapchat is a private place and they often lauded their app as a place for sharing silly conversation between friends. The lack of rapid growth could be interpreted as Snapchat not being as appealing to older audiences. To an investor, this lack of strong user growth might be seen as negative. Nevertheless, to the average 15-year-old girl who lives on Snapchat, the lack of any of the older guys can be seen as a positive.

Engagement is insane

This goes back to the idea that Snapchat is never going to get as big as Facebook or Instagram. However, what it lacks in reach, it makes up for in engagement. An impressive stat for Snapchat was that users open the app 18 times a day and use it for 25-30 minutes, with 60% of them creating Snaps or using its chat feature. This is incredibly impressive and should be what brands ought to focus on going forward.

Additionally, one should take heart in that although on average users visit Snapchat more than 18 times a day and spend 25-30 minutes on Snapchat every day, users younger than 25 visited Snapchat more than 20 times a day and spent 30 minutes.

A focus on average revenue per user

I spent some time reviewing both Facebook’s S1 filing and Snapchat's S1 filing, and Snapchat distinctly mentions ARPU, average revenue per user, as a focus of its filing. When Facebook filed its paperwork, it spoke in very general vague terms about advertising strategy, concentrating more on user growth. Snapchat, however, put its ARPU front and centre:

“Our global average revenue per user, or ARPU, in the three months ended December 31, 2016 was $1.05, compared to $0.31 for the same period in 2015. In North America, our ARPU in the three months ended December 31,2016 was $2.15 compared to $0.65 for the same period in 2015. ”

This should be of comfort to investors. Snapchat is still in the nascent stage when it comes to advertising and its focus on maximising monetisation for every user will be good news for investors. To put things into context, Facebook's average revenue per user grew worldwide by 29% in the last quarter, whilst Snap's grew by more than 300% for the same period.

Snap also mentions that "substantially all of our revenue comes from advertising" which bodes even better for investors. If Snap can clock in $404.5m in revenue in 2016 from advertising alone then this positions it incredibly well as it brings out new products.

Snap mentioned that it will be investing heavily in Spectacles going forward – although it said: “We have limited manufacturing experience for our only physical product, Spectacles, and we do not have any internal manufacturing capabilities." I think this is is a sheltering tactic; a tactic used to placate investors in case things go wrong. My prediction is this: Snapchat will bring out cheaper, more affordable glasses for its younger audience, which will contribute significantly to revenue.

Tiimothy Armoo is the chief executive of Fanbytes. Follow him on Twitter @TimArmoo

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