Yahoo Finance Think Snap's 2017 Was Bad? Watch What 2018 Brings
The new year is a little over a week old and already Snap (NYSE: SNAP) is having a rough go of it. So if you thought 2017 was bad for the vanishing message app -- er, camera company -- then wait till you see what 2018 holds.
From an IPO that went from hero to goat, to declining daily-user rates as Facebook (NASDAQ: FB) and its Instagram and WhatsApp platforms borrowed heavily from Snap's features (essentially doing Snap better than Snap), the social media channel had a troubled 2017.
Unfortunately, it looks as if a lot of the same headwinds that buffeted Snap last year will continue into 2018, and let's just say Snap's New Year's Eve bash was a microcosm of all that was wrong with the business -- and a prelude.
Image source: Snapchat.
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Snap wanted to welcome in 2018 in a special way for its employees and their guests and wanted to keep the affair private, so it blocked everyone from using Snapchat at the party. Guests were advised to leave their phones at home and to not take any photos. And just to make sure no one violated the policy, it blocked all snaps to the site emanating from the venue.
For a company built on being a social media platform that is all about taking photos and sharing them, it was a completely tone-deaf move. So the guests did the next best thing: They posted their photos on Instagram. If you want to prove the utility of the competition over your own service, there could hardly have been a better way to do it.
Not adding value
Virtually all of Snap's revenue comes from advertising, and while it's up 25% year to date from the year-ago period, it was reported Snap was discounting its rates to lure advertisers. While that's not a particular problem itself, though it does give off a whiff of desperation, it was further revealed that the advertisers were questioning the value of appearing on the site because ads received less than three seconds of view time on the app. Snap may have difficulty holding on to advertisers if they feel their spots aren't being watched, but like everyone who's viewed a YouTube video with advertising, your finger hovers over the ad so you can click the skip button.
Snap is facing a similar problem, which is likely why it's considering making users sit through at least three seconds of an ad before being able to skip past it. It's not unheard of, as just noted with YouTube, which can make you endure five seconds of an ad, though it at least shares revenue with the content providers for allowing the ads to appear with their videos. Facebook, which autoplays its ads as you scroll past them, has less than two seconds of view time. Forcing users to watch more of an ad that they've already indicated they don't want to watch is hardly going to endear the platform to users any further.
Inappropriate content
And Snap may face something of a revolt among its advertisers similar to what Google experienced with YouTube and the content the ads were appearing next to. In that imbroglio, advertisers objected to their ads appearing next to content purportedly objectionable and threatened to yank their ads from the service. Google responded in a rather ham-fisted way, yanking the ability of certain content creators from monetizing their videos even though the content is arguably benign.
Image source: CaptainMorgan.com.
Snap just lost the account of alcoholic beverage distributor Diageo (NYSE: DEO), the maker of Johnnie Walker whisky, Ciroc vodka, and Captain Morgan's spiced rum, after the U.K. Advertising Standards Authority (ASA) ruled that a sponsored lens Diageo promoted to make users look like Captain Morgan could be seen and used by those younger than 18.
Because it added a beard and a pirate's hat to a user's image, the ASA said Diageo broke the rules, and Diageo responded by pulling all of its advertising from Snap globally since, as the ASA said, "the adequacy of self-reported age as the sole means of targeting alcohol advertising on Snapchat" is questionable.
Better value elsewhere
And now comes word that analysts at Cowen & Co. found advertisers think Facebook and Instagram are a better opportunity for their ads to be seen than Snap is, which came in dead last in the survey -- right there with Pinterest. The analysts forecast a 30% drop in Snap's stock in 2018.
Although not included in the survey, Amazon.com (NASDAQ: AMZN) is also muscling its way into the digital ad space. As a company that generated 44% of all e-commerce sales in 2017 -- and 4% of all retail sales, period -- it offers advertisers a massive venue for reaching an audience ready, willing, and able to spend money.
The public markets are not always smooth sailing to riches, and the apparent promise of Snap's IPO has given way to a much more stark reality: Although millions of users still love the platform, there are much better social media sites that are still experiencing rapid growth, and investors may want to snap them up instead.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool recommends Diageo. The Motley Fool has a disclosure policy.
