Snap's (NYSE:SNAP) 2018 hasn't been great so far. CEO Evan Spiegel admitted to certain missteps in launching the redesigned app at the beginning of the year in a memo to employees that was sent at the end of September (and leaked by Cheddar's Alex Heath). Spiegel noted the biggest problem with the redesign was that it made it harder to communicate, moving away from the company's core product focus of being "the fastest way to communicate."
It's worth noting that Snap never mentioned its goal of being the fastest way to communicate in its prospectus for investors when it filed to go public. As a "camera company," Snap's focus was on "innovative camera experiences," and it's delivered on that over the past 18 months by expanding augmented-reality capabilities, integrating with Shazam and Amazon, and creating various other new features stuffed into the Snapchat app.
Those new features came at the cost of speed. And Snapchat is slower now than it was eight years ago when it launched, despite running on significantly faster hardware. Spiegel says unlocking this renewed core value of Snapchat is key to the company's strategy for 2019 and beyond.
Communication is key to keeping users
Snap faced its first-ever decline in daily active users earlier this year. The metric fell from 191 million in March to 188 million in June. Management had warned that the trend was downward after March users were below the average users during January and February.
The biggest reason is the redesign, and Spiegel suspects the shift in the redesign to the algorithmic friend feed was part of the problem. The new feed put a greater focus on Stories, which are more easily monetized for Snap, but don't always lead to engagement.
"We have learned over the past two years that we can grow our user base by providing the fastest way to communicate without providing Stories and other value-add features, but we can't directly grow our community by providing Stories without communication," Spiegel wrote in the memo. He points to users in Brazil who only used Stories and had a much greater churn rate than those who used the one-to-one communication features as well.
Spiegel believes that making it faster and easier to communicate will enable growth in developing markets and other regions where it's previously failed to attract attention. Snap had ignored emerging markets, noting that its camera features required high bandwidth and processing power. Doing away with extraneous features in certain markets could enable Snap to grow the Snapchat user base, but it'll be difficult to monetize. Note the difficulty Facebook (NASDAQ:FB) has had monetizing WhatsApp. (In fact, Facebook plans to use WhatsApp's stories product as one of the main sources of revenue.)
Refocusing Snapchat on communication and making the app faster will require significant investment with little monetary payoff. One-to-few communication is historically difficult to monetize. Snap's Sponsored Lenses -- the main way it monetizes communication -- are getting buried in a sea of lens options after it opened its Lens Studio to developers. Having video ads in the middle of Snaps from friends goes directly against the idea of speeding up communication.
Building a moat
In Snap's IPO prospectus, it said its only competitive advantage, for all intents and purposes, was its ability to innovate. Management ignored things like brand and scale, which Facebook used to quickly overtake Snapchat with its stories products in Instagram and WhatsApp. In his memo last month, Spiegel noted that Snap's brand and scale do indeed provide certain competitive advantages. As such, it should be working to leverage its brand and build scale.
If Snap can grow Snapchat's user base like it had been doing before going public, it could benefit from the network effect that enabled Facebook to grow its stories products to over 1 billion users. That network effect would protect Snap from seeing what happened with its Stories happen with its other product innovations.
While many users might cost more to serve today than they generate in revenue for Snap, especially with a renewed focus on communication and developing markets, Spiegel believes the long-term opportunity is greater if the company works to engage those users now and figures out how to monetize them effectively at some point in the future. That could put a drag on profitability in the near term.
That said, Spiegel (somehow) set a goal of reaching profitability for the full year of 2019 -- after previously setting the goal for the fourth quarter this year. Growing the user base in more established markets with high-value users is key to that goal. Otherwise, it's fairly incompatible with Spiegel's priority of improving the speed of communication.
It's encouraging to see Spiegel pushing a long-term focus within the company, and refocusing on the thing that drives user engagement and growth. But focusing on communication casts doubt on Snap's ability to effectively monetize users in the near to medium term, which could hurt its stock price as Wall Street grows increasingly impatient.