The Most Misunderstood Thing About Snapchat, According to Its CEO

These numbers might surprise you, but there's still more to the story.

Adam Levy
Adam Levy
Feb 26, 2019 at 7:21PM
Technology and Telecom

The biggest thing Snap (NYSE:SNAP) CEO Evan Spiegel thinks analysts get wrong about his company is that it's not that much smaller than competitors like Facebook's (NASDAQ:FB) Instagram.

"A lot of people are surprised when they actually look at the data and see the overlap between our audience and the audiences for products built by our competitors," he said at the Morgan Stanley Technology, Media & Telecom Conference. "In our core markets like the United States, or U.K., or France, or something like that, we tend to have roughly the same audience size actually as some products that people perceive to have much larger audiences."

Spiegel says anyone looking at the ad managers on various platforms will see there's not much difference at all. Indeed, an ad targeting U.S. users on Snapchat will reach a maximum audience between 82.7 million and 86.1 million, according to Snapchat's ad manager. Targeting U.S. users on Instagram Stories will reach up to 91 million users, according to Facebook's ad manager. Placing ads in the Instagram feed adds another 29 million users.

The Snapchat logo.

Image source: Snap.

The challenge for Snap

Snap's struggles with growing its user base over the last year have been well documented. Despite those struggles, its U.S. audience is still only slightly smaller than its biggest direct competitor's based on data from their respective ad-buying platforms.

But where Instagram is clearly beating Snap is in total advertisers. Facebook says there are now 2 million active advertisers using Instagram Stories. Snap doesn't provide active advertiser data, but it's a sure bet it's far less than 2 million.

Spiegel noted that growing the number of active advertisers on the platform is the best thing the company can do to grow revenue over the next few years. "The No. 1 driver is actually going to be the number of advertisers," Spiegel said.

Snap has started to show some progress in turning its ad pricing around. It's not clear whether those improvements came from better ad products or attracting more advertisers to the ad auction.

Instagram Stories, meanwhile, benefits from a funnel of 7 million Facebook advertisers. Those advertisers are finding it increasingly difficult to generate better returns from feed ads, so they've naturally expanded to ads in Stories. Facebook has helped facilitate that transition by offering tools like automatic ad placement and automatically formatting ads for optimal conversion in Stories.

There's more to the story

Investors and marketers might be operating under a misunderstanding regarding Snap's audience size relative to its competitors, but it's not like marketers haven't heard of Snapchat. And it's not like they're wholly unfamiliar with Snap's product either; Instagram Stories ads are very similar to Snapchat ads.

The misunderstanding that Snapchat is significantly smaller than its competitors is just a single hurdle for Spiegel and Snap. If Snap's inability to attract more advertisers is a result of the misunderstanding that it doesn't provide the same audience reach as Instagram, then it merely needs to invest in a sales team to educate marketers. The company did the opposite last year.

Check out the latest Snap earnings call transcript.

Importantly, however, Snap's challenge may go deeper than merely educating marketers about its audience size. It needs to prove it can provide a return on investment comparable to its competitors. Marketers' job is to maximize advertising budgets to produce the greatest outcome for their client. If Snap can offer better return for their ad dollars, marketers will take their money there.

That's where Facebook's broader total audience -- 2 billion daily users across its family of apps -- becomes a major advantage over Snap. Facebook's massive audience gives it incomparable data to mine and perfect its ad targeting. As a result, the company is able to place ads in front of the right person and in the right context, producing better returns for marketers.

So while Spiegel's argument that investors and marketers misunderstand the breadth of Snap's audience isn't necessarily wrong, he might also be missing the point.

Most marketers don't need to reach a massive audience.

They need to find their small audience within the massive audience. Facebook is much better at doing that than Snap largely because of the size of its total audience.