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Snapchat Takes a Step Toward Solving One of Its Biggest Challenges

By Adam Levy - Oct 17, 2017 at 8:03AM

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But it needs a huge leap to get the company back on the right track.

Snap (SNAP -4.94%) is always happy to boast about how much time its users spend in Snapchat. The last update management provided was an average of over 30 minutes per day for all users, with users under 25 averaging over 40 minutes per day.

Those numbers compare favorably with Facebook's (META -0.02%) Instagram, which noted that its users under 25 spend an average of 32 minutes per day and those over 25 spend 24 minutes per day in the app, on average. But Instagram user behavior differs from Snapchat user behavior in one key way: Instagram users don't spend very much time directly communicating with one another, while that's one of the core functions of Snapchat. Monetizing direct communication is difficult -- it's something Facebook has been struggling with for years.

"Snap Inc." on Snapchat yellow background.

Image source: Snap.

Snapchat is heading in the right direction

Snapchat's newest feature is called context cards. Snap is partnering with TripAdvisor, Foursquare, Uber, Lyft, OpenTable, and other companies to provide additional information about the Snaps they receive from friends. Swiping up on a message can give users information about their friend's location, and they can easily book a ride to meet up with them.

In addition, context cards will funnel users into Stories with Snaps from that location. That can drive more attention to Snap Maps, another recent feature with tremendous potential for monetization.

Context cards won't show up on every Snap. Only Snaps that use venue-specific geofilters will include the feature, and the rollout will probably come slowly. That said, there's a lot of potential for context cards to become part of every Snap simply by using Foursquare (or another partner's) data to determine where people are sending their disappearing messages from.

The monetization potential

Venues aren't paying for context cards, and it's unclear if Uber or Lyft is giving Snap a cut of any referrals it provides. (Probably not.) But the space provides a lot of potential for monetization.

Context cards could provide ad space for venues to provide a message or promotion to users. What's more, these are highly qualified leads that have already shown interest in a venue by swiping up to learn more and who have a close friend practically recommending they go there. Snap should be able to demand a good price for such a high-value lead.

More importantly, the ads would be accessible to small businesses. Attracting small businesses is a big challenge for Snap. It rolled out its self-serve ad platform and several tools to make creating Snap ads more accessible to smaller businesses earlier this year. Still, it doesn't seem small businesses are paying much attention to Snap yet. Meanwhile, Facebook counts some 5 million active advertisers, 2 million of which advertise on Instagram.

Providing a direct-response ad product that converts well could be the key to bring small businesses into Snapchat. From there, Snap may be able to sell its other ad products.

I'll believe it when I see it

Snap stock still remains too risky for a single new product launch to sway my thinking. Until Snap develops ad products around context cards or maps and proves they produce strong returns on investment for marketers, many advertisers will remain uninterested in the platform.

That's going to make it hard for Snap to grow revenue as much as analysts expect it to, especially with its shift to auction-based pricing. Fewer bidders than anticipated means that those who do enter the market don't have to spend as much to win the ad space they're looking for. That actually produces a somewhat vicious cycle, as Snap could be hesitant to roll out new ad inventory (i.e., new ad products) if ad prices are already depressed.

Snap has a lot of challenges to overcome still. But it's tackling one of its biggest -- how to monetize one of its most popular uses -- head-on. Look for further developments in direct-messaging ads as a means for Snap to keep growing. But until those developments surface and prove attractive to advertisers, I'm not buying into the stock.

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