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Snap Is About to Embrace Algorithmic Curation

By Evan Niu, CFA – Nov 9, 2017 at 5:01PM

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Like Twitter before it.

Twitter (TWTR 0.43%) adopted an algorithmically curated timeline back in early 2016, which caused some initial backlash among some of its most engaged users, who started a #RIPTwitter hashtag on the service. The fear was that Twitter would start to resemble larger rival Facebook (META -1.69%), which has long used an algorithm that decides what its users do or don't see in their News Feeds.

It's not clear why that would be a bad thing, though, since that strategy has clearly worked incredibly well for the dominant social network, which now has nearly 1.4 billion daily active users (DAUs). Beyond superficial comparisons as to who did what first, the underlying purpose is relevance. A tweet from 8 hours ago might be more relevant than one from 5 minutes ago, and with a strictly reverse-chronological timeline, you might miss the more relevant tweet.

Most importantly, it's been working for Twitter. The company has not only grown monthly active users (MAUs) to a record 330 million, but engagement has been soaring in the form of DAU growth ever since.

Chart showing daily active user growth accelerating

Data source: SEC filings. Chart by author.

Twitter still has its fair share of problems -- like monetization and Nazis -- but engagement is undeniably heading the right direction. Beleaguered Snapchat operator Snap (SNAP -1.34%) is now preparing to follow in Twitter's footsteps in adopting algorithmic curation. Will it work?

The algorithm is coming

On the earnings call earlier this week, Snap CEO Evan Spiegel announced a major upcoming redesign for the Snapchat app. Here's the relevant part of Spiegel's prepared remarks (emphasis added):

As part of the redesign I mentioned earlier, we're going to make it easier to discover the vast quantity of content on our platform that goes undiscovered or unseen every day. We think that there is a big opportunity to service some of this content in a personalized and more relevant way while still maintaining the exploratory nature of our service. We are developing a new solution that provides each of our 178 million daily active users with their own Stories experience, leveraging the tremendous benefits of machine learning without compromising the editorial integrity of the Stories platform that we have worked so hard to build.

Once this change is rolled out, investors will want to see if it translates into accelerated DAU growth, and then subsequently see if that can translate into ad revenue growth. Twitter has gotten halfway there.

Snapchat logo

Image source: Snap.

Spiegel was clear that this does not mean that Snapchat will add some type of content feed like those that are central to rivals' services. This was in response to an analyst who questioned how well Stories can be monetized, while it's been proven that content feeds can be monetized more effectively. Spiegel wants to differentiate Snapchat, and that means eschewing a traditional content feed.

Snap wants to become a go-to destination for mobile video content, one that can serve up algorithmically curated video content that it hopes will be relevant to the user, all the while monetizing that usage by serving up video ads. It's far too early to say whether or not Snap can accomplish this, but in the meantime, there is another service that already does exactly this: YouTube.

Evan Niu, CFA owns shares of Facebook and has the following options: long April 2018 $17 puts on Snap Inc. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.

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Twitter, Inc.
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