Snap (NYSE:SNAP) is being cut by the dual-edged sword of its automated ad buying program. While increasing the ability of advertisers to purchase their own spots is attracting more marketers to the platform, by relying on programmatic ad purchases Snap ad prices are falling and this will impact revenue.
eMarketer says Snap will no longer hit the $1 billion in ad revenue that eMarketer previously forecast for this year. In fact, prices have so depressed growth that eMarketer doesn't see Snap crossing the $1 billion threshold until 2020.
Ad program slows revenue growth...
Snap ads are 10-second, full-screen vertical videos that advertisers can run across a Snapchat user's stories, curated live stories, or on the Discover section. Programmatic ads tend to be cheaper because they are self-serve and eliminate the need for Snap salespeople to sell the advertising directly.
Three-quarters of Snap's ads are now sold programmatically. Snap CEO Evan Spiegel told analysts in August that programmatic advertising "has removed friction from our advertising business and allowed us to scale to many more advertisers than we could have reached with our direct sales force." Advertising revenue rose 48% in the second quarter, with the programmatic portion up 485%, but to eMarketer's point, pricing was down 29% from last year and 9% sequentially.
The marketing site says its revised revenue figures mean Snap now controls just 0.6% of the digital ad market, flat from the year-ago period, and below the 1% eMarketer was predicting. While it had previously forecast Snap hitting $1 billion in revenue this year, it has reduced that to just $662.7 million, or an 18.7% year-over-year increase.
While eMarketer's analysts believe Snap made the right decision in making the switch, and eMarketer sees growth accelerating again in 2019 and 2020, Snap continues to lag far behind the giants of the industry, Facebook (NASDAQ: FB) and Alphabet's Google, which together control almost 58% of the market.
...but could make it a better business in the long term
There could be other problems as well. Snap reported its first decline in average daily users last quarter, losing 3 million. That was largely blamed on the disastrous app redesign ushered in by Spiegel, though it has gone to great lengths to undo many of the more disliked components that caused users to flee. What Snap needs to prove is that it can regain control of the narrative, bring in more users again, and keep them engaged.
Advertisers are not yet certain that Snapchat is an effective medium for reaching an audience, despite some advertisers claiming engagement has improved. It's largely seen as something big accounts can get mileage out of while smaller advertisers remain skeptical. They're also not sure Snap is able to target ads to audiences the way Facebook can.
Snap does have a few things going for it, such as Snapchat remaining the most popular app for teens. eMarketer believes that while Facebook will lose 2.2 million 12- to 17-year-olds by 2022, Snapchat will add 1.2 million.
Snap is also introducing more tools to help advertisers, such as extending its partnership with Nielsen to allow advertisers to target consumers who made specific offline purchases. Using loyalty card and credit card data, Nielsen enables advertisers to target their campaigns to people more receptive to buying.
Sometimes you have to take one step back to move two steps forward, and though Snap's migration to programmatic ad buying is temporarily depressing revenue, it looks as though it will be able to leapfrog ahead if it gains traction on user engagement.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends GOOGL, GOOG, and Facebook. The Motley Fool has a disclosure policy.