It might be time to snap at Snapchat

 

SNAPCHAT.-BLOG

 

Off late there has been an immense amount of speculation about the long-term viability of the company’s strategy. Two elements of it have caught my attention: Snap’s statement that it is a “camera company, and its intention to reinvest its revenues in developing new products that will take significant time and expense, but which it believes it can develop faster than competitors.

 Focus and strategy are what define winning entrepreneurial leaders (we aren’t even going to talk about their acumen, because that’s a given). It’s what Spiegel is missing, apart from the point in this whole scenario. For instance, when asked about Instagram, on Snapchat’s first earnings call amidst explaining the loss of $2.2 billion against revenue of just $150 million, he point blank quipped: “Just because Yahoo has a search box, it doesn’t mean they’re Google.” That’s true, but it doesn’t necessarily imply what Spiegel wants us to believe.

 And unlike Snapchat’s stories, quotes and quips never disappear into the web, along with the hidden stash of deleted pictures and drunken text messages.

 It’s not all been bad news (and bad press) though. In Q1 2016, Snapchat averaged 122 million daily active users, having grown 14% over the past quarter. Then Q2 proved to be its best growth quarter ever, thanks to massive interest in full-screen visual communication and a lack of direct competitors. Snapchat hit 143 million daily users with a whopping 17.2%  growth rate. That’s big, and I won’t even say that begrudgingly. But things changed soon after.

 On August 2nd, Snapchat’s (much larger, more hipster) competitor Instagram launched an exact clone of Snapchat Stories at the top of its app, which was used by 300 million people daily and 500 million people each month. By October, the feature had 100 million daily users.

 Suddenly, Snapchat slowed down. It had its lowest growth quarter since the beginning of its publicly available data in 2014. Snapchat grew just 7% in Q3 2016, to reach only 153 million daily users. And in Q4 it sank even further, as Instagram Stories reached 150 million daily users  – the puppy dog filter clearly wasn’t working anymore.

 Given this background, his response to Instagram reflects a decades-old debate over what strategy is, one that’s being re-litigated time and time again in the digital age.

 In Snap’s S-1, the company says:

 Our strategy is to invest in product innovation and take risks to improve our camera platform. In a world where anyone can distribute products instantly and provide them for free, the best way to compete is by innovating to create the most engaging products.

 Does Snapchat deliver what it propositions?

 Well if this is the case, Spiegel should ask himself three questions. (1) Is he mistakenly placing focus on easily imitated products, rather than platforms, (2) losing sight on its core interaction, and (3) building on hardware platforms that will one day be commoditized, then he might have to be worried about Snap.

 Raffaella Sadun, a professor at Harvard Business School, says the challenge for Snapchat is that “great product is different from great strategy”. As Ben Thompson noted, “Most companies use their S-1 to explain how they are building a sustainable competitive advantage — a moat, if you will. Snapchat is declaring that moats no longer exist.”

 One reason why it’s so hard for Snap to articulate a traditional strategy is that, arguably, the best one is already taken by Facebook (as most things in the world are). The way you make money with a social network is through network effects, a lesson I learnt while building LurnQ (which eventually failed, but that’s not the point) – the more users you have, the more valuable the platform becomes for all your users; hence scalability becomes a powerful competitive advantage. But if that’s where the value is, Facebook will beat Snapchat every time, and it will do so in the snap of a second. For instance, Instagram Stories, a feature seemingly derivative of Snapchat today has more daily users than Snapchat. So, Spiegel needs to articulate a theory of why Facebook can’t copy Snap’s product innovations and then use them to capture even more value through its larger network.

 To date, his answer has been innovation. That puts him firmly on one side of the long-running strategy debate. Is it sufficient to develop capabilities that seem hard for competitors to imitate, like building camera-based social applications? Or does sustainable strategy require more?

 The debate over how sustainable “operational advantages” are continues to this day. But even if one grants that certain capabilities can be hard to imitate, Spiegel needs to explain why Snapchat’s features can’t be copied.

 In a recent paper, economists Joshua Gans and Scott Stern argue that execution can form the basis of sustainable advantage for entrepreneurs, but only under certain conditions. In their model, execution-focused strategies help startups get to the market quickly and start learning directly from customers, “allowing the firm to ‘get ahead, stay ahead.’” It’s not clear that this applies to Snapchat, which came to the market later than Facebook and thus, has had less chance to learn from its users.

It doesn’t help that Spiegel seems to be misinterpreting Google’s success in relation to Yahoo. Google didn’t get where it is just by building great products. It built great products and then fended off competitors by acquiring them, or by using its huge user base and massive data trove to improve its products in ways that their rivals couldn’t. Google had a strategy (like it most certainly, always does.) Google’s “product” language is code for defensible, value-added additions to the core platform interaction.

 None of this is to say that Snapchat can’t succeed. Its success will depend on whether advertisers see it as a complement to Facebook or a substitute, as well as whether Snapchat can capture a segment of valuable users and find a way to keep them from switching to Instagram. Right now that doesn’t seem to be happening.

 The question is, why do I need Snapchat, an added application, when Facebook messenger offers the same features and more?

 Because the filters just don’t cut it anymore.

 

Tarun Mitra

Founder & Creative Strategist @practicenext interested in Building Brands with Digital DNA, Design, Fashion & Beer. Founder/Ex-CEO @LurnQ, Ex-VP @aptechltd

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