How Snapchat Makes Money: advertising

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Social-networking giant Snapchat, now officially called Snap Inc. (SNAP), describes itself as a camera company. That’s because its flagship product is a camera app called Snapchat that allows users to connect with family and friends, exchange photos (‘Snaps’) or videos (‘Stories’), and chat. Snapchat is a platform for selling advertising space. That’s how Snap, the company, generates substantially all of its revenue.

Snap faces significant competition from other companies focused on mobile engagement and advertising. That includes technology companies with digital platforms, and also companies in the more traditional sectors of print, radio, and television. Major competitors include Apple Inc. (AAPL); Facebook Inc. (FB), including its Instagram and WhatsApp offerings; Google, whose parent is Alphabet Inc. (GOOGL); and Twitter Inc. (TWTR).

Key Takeaways

  • Snap offers a mobile-phone camera application that allows users to take photos and videos, exchange them with family and friends, and chat.
  • Snap generates substantially all of its revenue through advertising.
  • The 3-year-old public company is moving toward profitability as it sharply narrows its losses and as revenue accelerates.
  • Snap is testing new designs for its flagship app that could further boost growth.

Snap’s Financials

Snap posted an annual net loss of $1.0 billion on $1.7 billion of revenue during its 2019 fiscal year (FY), which ended December 31, 2019. While Snap has posted net losses in each of the past five years, those net losses have been decreasing since 2017, the year in which the company first went public. Net losses are typical for newer companies still focused on generating future growth. As much as 62% of the company’s revenue originated in North America, which includes Mexico, the Caribbean, and Central America. The U.S. alone accounted for a full $1.0 billion. Europe (including Russia and Turkey) and other countries throughout the world accounted for 18% and 20% of total revenue, respectively.

Snap will celebrate its ten-year anniversary this year, having been founded in 2010 as a California limited liability company (LLC) named Future Freshman, LLC. After several name changes, the company eventually settled on its current name Snap Inc. in 2016.

The good news is that growth in Snap’s annual revenue is starting to accelerate again after its revenue growth rate more than halved from 2017 to 2018. Revenue grew 45.3% in 2019 compared to 43.1% in 2018. That’s still slower than annual revenue growth of 104.0% and 589.5% in 2017 and 2016, respectively. Out of the geographic segments noted above, revenue for Europe in 2019 grew the fastest at a rate of 63.8%.

The strong revenue growth reflected continued increases in Snap’s Daily Active Users (DAUs) and growth in Average Revenue per User (ARPU). Snap finished the fourth quarter of 2019 with an average of 218 million DAUs over the three-month period, 17% higher than the same quarter a year ago. The company posted ARPU of $2.58 during Q4 2019, up 23.4% from the year-ago quarter.

Snap’s Business Segments

Snap has no individual business segments that it breaks out in its financial metrics. Substantially all of Snap’s revenue is generated from advertising, which accounted for 98% of the company’s total $1.7 billion in revenue in 2019, down from 99% in 2018. The company says it also generates a small and “not material” share of revenue from Spectacles, the company’s only physical product. Spectacles are sunglasses that connect to the Snapchat app and allows users to make Snaps and record videos. Snap earnings cannot be broken out because the company does not produce positive net income.

Snap’s camera-app, Snapchat, can be downloaded to mobile devices free of charge. All of its features can all be accessed for free, including by creating Snaps; conversing with family and friends through Chat; and finding friends’ Stories on the Discover feature. These features are designed to drive user engagement, which in turn helps to attract advertisers and drive revenue from advertising, which includes Snap Ads and Sponsored Creative Tools.

Snap Ads allows advertisers a way to tell stories similar to the way Snap’s users do, while also providing additional features such as long-form video, and the ability for users to visit an advertiser’s website or install an advertiser’s app. Sponsored Creative Tools includes Sponsored Geofilters and Sponsored Lenses. The former allows users the ability to interact with an advertiser’s brand. The latter provides users with branded augmented reality experiences.

Snap’s Recent Developments

Snap is testing new designs for its Snapchat app, which could accelerate its path to profitability if successful. One of the redesigns aims at improving user experience of the Snap Map. “We’re exploring ways to streamline navigation across Snapchat, soliciting feedback from our community to inform future versions of our app,” a Snap spokeswoman told The Verge, an online technology-news magazine operated by Vox Media.

The other potential big redesign is focused on breaking news headlines that are presented to users within the app. “We are in the very early stages of exploring how to evolve news offerings on Snapchat,” the company said.

The past year also saw changes in top management. Snap announced in May 2019 that Derek Andersen was appointed Chief Financial Officer (CFO). He succeeded interim CFO Lara Sweet who was promoted to the role of Chief People Officer.

Source: Investopedia

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