Snapchat’s Billion Dollar Dilemma

By Nicholas L. Johnson

Snapchat has a problem. Its platform isn’t built to scale.

This might seem like a weird thing to say about a company that had the most-downloaded app of 2016, is growing nearly 30% year over year, and just passed Twitter and Pinterest in daily active users.

But all it needs to do is look to one of those companies – Twitter – to see where it could all go wrong, fast.

The pressure on the recently rebranded Snap, Inc., is even greater as it looks to go public next year. The company set a revenue target for 2016 of $300 million, which it far exceeded. However, it’s set an even more aggressive target of $1 billion for 2017.

Oddly enough, Snap’s position is remarkably similar to Twitter’s when it went public in 2013. At the time, Twitter was pulling in $422 million in advertising revenue and set a goal for the next year to generate $1 billion.

Similarly, it had about 250 million monthly users and a growth rate of about 25% YOY. (Snap reports only daily active users, not monthly, and had about 150 million at last count.)

But what happened to Twitter could very easily happen to Snap. Twitter ultimately beat its 2014 goal, generating $1.4 billion in revenue that year. However, to investors, this improvement didn’t matter. Twitter was still losing money (and still is), and its user growth stagnated, as it was unable to grow its network at nearly the same rate as before.

Twitter, which once had aspirations of being the next Facebook, eventually topped out at a little more than 300 million users, well short of its billion-user aspirations.

Why Twitter Didn’t Scale

Twitter has long had the same problem that Snap has today: its platform doesn’t scale.

Twitter’s core product worked great when its network was comprised of a handful of tight-knit communities, but as Twitter grew and its network expanded, Twitter’s product didn’t change with it.

Twitter remained too loyal to its core users and ignored its newest ones, who didn’t understand what Twitter was or how to use it. They’ve returned the favor and ignored Twitter right back.

Twitter has since made minor product improvements, like Moments, but they haven’t been sticky enough new users or to entice old ones to come back to the platform.

It’s still too difficult to find quality, relevant content on Twitter. For new users, it’s not particularly easy to find who to follow. And even if you do, it’s not easy to find the right content at the right time. Twitter has remained too faithful to the same, mostly reverse-chronological timeline for far too long.

Imagine, for example, if all Google’s search engine gave you was a list of the 10 most recent web pages with little to no sorting for relevancy. That’s essentially what it feels like to use Twitter.

As Twitter’s network grew, the user experience has been badly damaged by spam and poor quality content. User growth has stalled largely as a result, and its stock price has plunged. (We had some thoughts for resolving Twitter’s woes a while back.)

As it aims for a successful IPO, Snap would do well not to repeat Twitter’s mistakes.

Facebook’s Formula

Luckily for Snap, there’s a roadmap for it to follow. Twitter was trying to be the “next Facebook” because there already was Facebook. If Snap wants to be the next Facebook and not the next Twitter, it should follow the former’s example, not the latter’s.

While Twitter’s founders were hesitant to revamp the platform, Facebook’s founder had no such qualms.

Mark Zuckerberg has regularly made massive changes to Facebook’s core social networking platform over the years, none more pronounced or controversial than Facebook’s News Feed.

Before the New Feed was introduced, Facebook was a network of siloed profiles with no common place to view what was happening on the platform. Like Twitter today, it was hard to find what you were looking for unless you already knew where to look.

This problem wasn’t hurting Facebook’s growth when it was still a relatively small, niche social network for college students, but, before Facebook could open up to the general public, Zuckerberg knew it had to change.

Facebook introduced the News Feed in September 2006, a little more than a decade ago. The digital equivalent of mass hysteria ensued. “About one million people joined a protest group threatening to quit if we didn’t change Facebook back,” according to Zuckerberg.

But while users complained, often vociferously, Facebook’s data showed that the News Feed made users spend significantly more time on Facebook. Despite their protests and concerns about privacy, users loved the News Feed. Some within Facebook wanted to roll back the Feed given the magnitude of anger displayed by users, but Zuckerberg stayed the course.

And with that, Facebook was ready for the explosive user growth that would come with its expansion beyond students and young people.

Unlike Twitter, Facebook figured out how to govern its network in a way that made it easy for users to find relevant, timely content every time they came onto the platform.

Rather than all the hoops Twitter tries to get users to jump through to keep them engaged, Facebook pursued a very simple goal: get a user to reach seven friends within their first ten days.

The company soon discovered that News Feed could deliver them enough timely content to keep new users engaged and coming back.

Over time, Facebook has continued to refine the feed, shifting away from strictly reverse-chronological order toward a highly personalized and curated feed that aims to show you the content you’re most likely to find engaging.

The Money Feed

Facebook’s News Feed had another huge benefit for the company: it made it far easier to monetize via ads. Facebook’s algorithmic, personalized approach made it much easier for user to find relevant ads and to display them within their feeds.

This kind of highly targeted advertising is much more lucrative than the kind of banner or display ads Facebook was serving up previously. It also greatly helped to increase engagement for advertisers.

It’s no accident that Instagram, which Facebook acquired in 2012, shifted to its own algorithmic news feed this year as it tries to increase revenue and sustain its astronomical user growth. (This month, Instagram surpassed 600 million monthly active users, with more than 300 million daily active users.)

What was the impetus for the change? Instagram saw that the average user missed 70% of the photos that were posted by the accounts they followed. Much of that content could be highly relevant to users scrolling through the app, even if it was a few days old.

Switching to an algorithmic approach was necessary as the platform grew beyond the point where users could easily keep up with most of the content that was posted. Without this change, Instagram risked becoming just as noisy and hard to navigate as Twitter.

Rightly, Facebook saw what worked on its social network and applied its lessons to its up-and-coming content platform.

Snap’s Product Mistake

So how do these lessons apply to Snap?

Snapchat’s platform today is at the same stage that Twitter was before it went public, both in terms of user growth and revenue, and that Instagram was at a year ago.

In other words, it’s time for an algorithm. Snapchat’s content platform, Stories, needs algorithmic curation if the company wants to continue to grow its network and revenue. Unfortunately, Snapchat has made some curious and wrong-headed product decisions recently that run counter to its ability to shift in this direction.

Most notably, Snap eliminated Snapchat’s Auto Advance function for Stories, which automatically pushed you into the next Story posted by users you follow once the current Story ended.

Some users complained about the autoplay feature, as it didn’t allow you to only watch the one or two stories you wanted. The result was that many users would quickly skip through Stories they didn’t want to view.

Snapchat rolled back this feature last month, changing instead to a model where users can click a checkmark to select content they want to view in sequence, effectively creating an ad-hoc playlist feature that allowed users to pick the Stories they wanted to watch.

If users didn’t select multiple pieces of content, they’d be returned to the list view of all the Stories posted in the network and would need to click on another Story to play it.

Unfortunately, this change was perfectly backward. Rather than remove the Auto Advance functionality, Snapchat should have kept it as the default. If a user wanted to watch specific Stories, then the app should’ve created an option to pre-select the viewing list. Want to only view one Story? A simple long press could have solved that use case easily.

Snapchat Needs an Algorithm

Why is this mistake such a big deal?

The autoplay feature created the perfect opportunity for Snapchat to build its platform’s equivalent of the News Feed.

The way the autoplay feature was previously implemented, once the current Story ended it just played the next Story in reverse chronological order. Ads were occasionally displayed between stories.

Like Twitter, the platform didn’t filter for relevance or past engagement. Presumably, Snapchat can track how often users engage with Stories and the other types of content available. Yet none of this data has been used to provide users a better, more personal experience from the platform.

The real problem wasn’t the autoplay feature but rather the way it was implemented. It didn’t account for the growth of Snapchat’s network, where users are no longer following only their friends, but also celebrities, public figures, professional acquaintances, and even randomly met strangers.

All of these people are not equally relevant every time a user opens Snapchat, yet the platform treated them as if they were.

Snap’s version of the News Feed should have been the Story Stream: a continuous stream of content sorted and filtered by relevance and informed by past user behavior.

Like Facebook, Snapchat had the opportunity to create a continuous “feed” of content. It backed away from the opportunity. For those looking at whether to invest in Snapchat’s IPO and future growth, this decision doesn’t bode well.

The Billion Dollar Dilemma

Killing autoplay won’t just hurt Snapchat’s ability to grow its network. It will also hamper Snap’s ability to increase its ad revenue.

Presently, Snapchat earns most of its revenue from a mix of partners who create content for its Discover tab and advertisers who pay to insert short video ads between Stories. Without an autoplay feature, users are much less likely to even encounter an advertisement let alone watch it.

This lack of clearly monetizable content makes Snapchat’s decision to kill autoplay even more curious.

A curated, continuous video stream offers a natural venue for Snapchat to serve up ads to its users. Without a personalized stream, there’s no clear way for Snapchat to get its users to regularly engage with sponsored content.

With a target of $1 billion in ad revenue for 2017, this is no small roadblock.

Advertisers have already balked at increasing their spending on Snapchat, as they view the platform as difficult to use and get engagement from. Additionally, the majority of Snapchat’s ad revenue is currently generated by its human sales team. If Snap wants to surpass $1 billion, its automated advertising needs to improve and rapidly grow its share of the revenue pie.

Snapchat’s leadership has thus far shown incredible product acumen, so there’s reason to hope they have a larger plan here. But if Snapchat doesn’t implement this plan quickly, it may be too late. And it may cost the company a lot of money.

With its IPO fast approaching, Snapchat’s ability to grow revenue and users over the next year will be key in determining the success of Snap’s public offering. If Snap doesn’t meet investors’ expectations, that will mean a lot of real money lost in the size and share price of its initial public offering.

In removing its autoplay feature, Snapchat effectively blew the best shot it had at building a simple vehicle to grow its network and revenue over the next year. It’ll be interesting to see if it makes a return or if Snap finds a new method for actualizing growth.

Does this mean Snapchat is bound to be the next Twitter – a one-time tech darling that has become synonymous with investor disappointment? Not necessarily.

But Snapchat’s window of opportunity is disappearing just as fast as your next message.

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Filed under: Platform Innovation | Topics: content platform, Facebook, platform innovation, snapchat, Twitter