The Snapchat Opportunity

Posted on Nov 27, 2014 7:10:00 PM

snapchat-logo-png-transparent-backgroundI've been thinking about Snapchat a lot1 in the wake of its announcement of Snapcash, a feature that enables users to send each other money. This nascent business space, called mobile peer-to-peer payments, is currently led by Venmo, a company wielding significant first-mover advantage. After unpacking the deal further, I became convinced that Snapcash is about much more than simple peer-to-peer payments. Instead, it stands as the final pillar of a product strategy that could install Snapchat as one of the most fearsome competitors in the mobile advertising industry.2

The article explores Snapchat's massive mobile opportunity, and is divided into four parts:

  • An overview of the mobile peer-to-peer payments space, to contextualize Snapcash within an immediately identifiable business space
  • A tour of the Snapchat product, to build a foundational understanding of where Snapchat is today
  • An analysis of Snapchat's opportunities in advertising and commerce, to demonstrate where Snapchat might go
  • A brief summary of the challenges facing the company as it deploys its monetization strategy, to demonstrate the company's risks and weaknesses as it executes on those opportunities

Let's get on with it!

Some Background on the Payments Space

Square Cash, the underlying service that powers Snapcash, has not seen much traction as a standalone app. Venmo has emerged as a leader in the peer-to-peer payments space because its very nature promotes network effects that create lock-in, and creating a big user base first is hugely advantageous. This has manifested itself in two ways: first, the service is only useful to me if I have friends also using the service, which raises the cost of switching. Second, Venmo's referral bonuses helped build a large user base quickly. While the referral bonuses were not long-lasting ($5 got me maybe a twelfth of the way through this post), nature dictates that people are strongly discouraged from creating accounts for additional services to accomplish the same task.

Square's play here is clever, then, because it is a Trojan Horse, as it pins its consumer payment ambitions on a wildly popular service where more photos are shared daily than there are on social juggernaut Facebook. And that's great for Square, especially since some analysts are assuming that company is receiving compensation from Snapchat for the partnership. But if you're Snapchat, why do you do this?

Seeing Snapcash as purely a solution for the problem of sending a friend money is a myopic view of the service. Taking a brief tour through Snapchat's feature updates proves instructive for enhancing an understanding of Snapchat as a media company. This tour is divided into the five seminal releases, which, combined with announcement of Snapcash, provide the foundation for a user-friendly commerce platform.

A Brief Tour of Snapchat, the Product

  1. 2012 - The initial Snapchat app launched as a service that allowed users to privately send each other images. Users could draw on and add captions to the images (which is very fun), but the most interesting feature was that the images disappeared after a number of seconds that the sender determined. Naturally, the prudish commentariat erupted that this was simply a sexting app.
  2. December 2012 - Snapchat's next version emerges with a friendlier user interface and the ability to send videos recorded from within the app, which could also be captioned, and like picture Snaps, could only be viewed once before being auto-deleted from a user's phone. The commentariat's prudishness reaches fever pitch.
  3. October 2013 - "My Story" allows users to post multiple snaps into a story that collates them in order for 24 hours, establishing the company's first foray into one-to-many messaging. The obvious purpose here seems to be to allow brands to broadcast ads. Fortunately, it ends up being a lot cooler than that.
  4. May 2014 - Snapchat launches a text-messaging feature, which allows users to have one-on-one conversations that disappear when they leave the app. At the same time, the company launches a one-on-one video chat feature, which enables real-time video communication and establishes itself as Snapchat's first synchronous messaging component (i.e., both members of the chat must be present at the same time).
  5. July 2014 - Snapchat launches "Our Story," similar to the My Story feature, except that it is a collaborative story that any Snapchat user within a certain geography can add footage to. The feature debuts at Electric Daisy Carnival in Las Vegas, Nevada.

These first five main product and feature releases represented Snapchat building the foundation for an eventual actual business. What went from a private, ephemeral photo-sharing app made obvious expansions into video and text, and then a less obvious leap into one-to-many communication, and in what, to me, is the least obvious and most clever feature of all, the collaborative, semi-public "Our Story." Snapchat spent its first five major releases creating rich and innovative social media experiences.

The final product tentpole, then, is the most basic action of commerce itself: payment.

So, then: what might you use Snapcash for?

I watched Snapchat's announcement snap (more on that below), with a degree of amazement, as it represented a move into what I saw as a discrete space. About fifteen minutes later, I said, "Ooohhh" to no one in particular as my mind jumped to what the prudish commentariat had likely immediately thought: "You can buy nude pictures with this!"

And indeed, people will do that. But a subset of the population paying for pornography in 10-second bursts probably is not going to produce a revenue stream Snapchat has much interest in buttressing. I became convinced there is a lot more to Snapcash than meets the eye.

Snapcash is a move to establish a trustworthy payment structure as Snapchat makes a larger play on its path to becoming a formidable media company.

Snapcash as a P2P payment service is the first layer of a larger strategic commercial move. This layer is concerned primarily with infrastructure and psychology. Snapchat, in partnering with a well-known payments industry player, gets to immediately leapfrog the privacy concerns the company has faced at prior releases. It instead allows users to adjust to the idea that, "hey, we can use Snapchat's Chat function to send each other money." So, Snapchat now has a built-in ability to process something like payments, though there's no real transactional structure at this time. Then, when the company adds the ability to do other things with Snapcash, there will be less of a cognitive leap for users to make, as they are already accustomed to that idea.

The Snapchat Opportunity

I used Snapchat quite a lot this weekend, at the 131st playing of the Harvard-Yale rivalry football game. Besides being one of the worst sentences I've ever written, that last one serves to represent the enormous amount of fun I had playing with the app, and one of the rare times I've found social media to improve my experience of an event as it was happening. (Twitter is the only other tool that's had that effect, though I've chiefly used it to monitor things where I was not actually present.)

The fifth item on the Snapchat product tour above, "Our Story," is just fun. Last weekend, that story was College Football Saturday, featuring Harvard-Yale, a game for which I was physically present. Our Story allows a group of people, united by a common interest, to show their perspectives surrounding an event that thousands of people are attending and even more are following remotely. There's an almost visceral thrill to viewing the story and looking for the best segments, your friends, or a video you posted. Because you must be in a certain geographic region to add to those stories, though, the story that gets created feels like something you are really a part of (though none of my Snaps made it into the video).

As part of the game day weekend, the company also made a couple of custom filters available for use on photos sent to friends (one of them said "Yale at Harvard" and included a football in the corner, the other had "CAMBRIDGE, MA" emblazoned big jersey lettering). They were legitimately fun to use. Yet, these are only anecdotal examples of how Snapchat can provide a compelling social experience. What they really represent is Snapchat's convergence on multiple social and messaging territories.

While in its first product phase, Snapchat could only provide one-to-one picture messaging, the company quickly expanded to video messages. Then, it built its first broadcast (one-to-many) feature: My Story, which allowed anyone in your network to view your Snaps. Next, it added one-to-one text messages and realtime video chats. Finally, Snapchat added Our Story, which created the space for collaborative, interest-based, one-to-many broadcasts. It is in the one-to-one communications where most users' regular activity will actually take place, but in the broadcast formats that Snapchat's biggest growth opportunities lie.3

"Our Story" could be a platform for showing you ads about things near you, related to the thing you care about. Imagine Our Story at a music festival, or a political convention, or indeed, a football game. Event sponsors could serve ads within that stream in a way like it's part of the story—regardless of whether you're present for it. Meanwhile, Snapchat could serve an ad for an on-site vendor you're located near while you're viewing Our Story, and a well-built Snap Ad would be tailored specifically to your location and established interest (you've already chosen to attend this event, and view this specific stream). This would be a form of native advertising—content-driven advertising built on and directed toward user interest, and coincidentally the most promising form of mobile advertising (all of Facebook's revenue growth comes from in-app native ads). Moreover, Snapchat is already building stories around other common interests, such as shared college campuses. College students are right in the habit-forming, unwisely-spending demographic advertisers love, and the opportunity to engage with them is enormous.

In fact, while brands have already opted to start working with highly-followed, so-called Snapchat Celebrities, who can send you Snaps or post their own Stories, I believe "Our Story" is the first place you will see advertising from a Snapchat-sponsored ad exchange. This makes sense for a few reasons: it maximizes potential reach, in-Story ads will be well-produced (and likely with tools not accessible to mortal Snapchatters), and finally, the system would be opt-in and unobtrusive.

In terms of reach, Our Story thus far has been used for high-attendance events of interest and for campuses where one might have a personal stake thus granting access to audiences with specific interests. Next, Snapchat's own new feature announcements, which come as Snaps from the company, are extremely well-produced (and usually link to longer-form YouTube videos)—I suspect Snapchat advertisers will be granted access to the same production capabilities (maybe an eventual Snapchat Creative department even offers in-house services). And finally, Our Story will not make users feel like ads are invading "their Snapchat"; the company has cleverly split individual, one-to-one Snaps and messages from the one-to-many Story updates into separate parts of the app to reinforce this distinction.4 A major challenge to any company monetizing a messaging service via ads will be to provide an experience that does not feel intrusive, which creates significant stumbling blocks if you're planning on sending ads as messages or or basing ads on message content, rather than some other vector. Snapchat has done an amazing job of putting all the pieces in place for an ad platform that avoids the potential pitfalls of in-app advertising, and many of the ones of conventional online advertising.

One of Snapchat's most interesting opportunities, though, comes back to Snapcash. Let us return briefly to one of the settings from earlier—a convention, festival, or big game. Imagine now that you get an ad served from a nearby coffee stand, the autograph line of your favorite artist, or the souvenir shop, and you being able to purchase any of those opportunities directly from Snapchat. You're shown any of those opportunities for an exploding time period. A good Snapchat Ad would produce the ultimate impulse buy experience.

Snapchat's Challenges

Snapchat has a couple of challenges on its path here: privacy and longevity. The privacy question asks whether Snapchat can secure and respect its user data in the face of several instances where it has not been able to. The longevity challenge is more existential: does Snapchat have the staying power necessary to execute on such a vision as laid out above, or will it prove to be a longer-lasting fad after all?

Snapchat has done a nice job partnering with Square to sidestep the privacy question with payments, and the company should be applauded for such a bold and forward-thinking move. As the company becomes more concerned with the sale of its eyeballs to advertisers, though, this question will inevitably rise will more frequency. What matters is that Snapchat proves its ability to create strong and secure infrastructure and makes clear to its users what kind of data they are making available by opting into the use of the product. While that is obviously easier said than done, consumers have proven time and again that they will forgive the privacy missteps of companies in exchange for their free services (see: Facebook and Google for just two easy examples).

Snapchat's other challenge, avoiding faddishness, looms a bit larger. While the service is immensely popular with younger smartphone users, the question of whether it will remain so hangs unanswered. I am confident in its prospects on this front, though, as a generation comes of age seeing Facebook as the stodgy necessity of an older set, and the dangers of communication permanence reveal themselves. There will never be any concept of going back and deleting embarrassing Snaps, because the product has already done it for you. It renders Snapchat unapologetically about the present. Certainly, another company could swoop in with a better product, but the costs of switching and lock-in apply to Snapchat in the same way they have buoyed Venmo. A competitor would have to blow Snapchat out of the water to justify the cost of switching. Thus far, they decidedly have not. So there is the irony: Snapchat's ephemerality will lend it its longevity.

Snapchat's Prospects

Looking at job postings, it becomes clear that Snapchat is a media company intent on growing user-generated content products that it can sell ads against. And with evidence showing that Snapchat is more popular than Facebook and Twitter in less than a year, the company will prove a force to be reckoned with, especially as a natively mobile application with a barebones website and core focus on a single product. The pieces are in place for Snapchat to start building an empire. Now comes the hard part.

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1 I discussed Snapchat briefly in this week's newsletter, to which you should immediately subscribe.

2 Let's be clear: while Google is the current leader in Internet advertising, it holds only a small piece of the pie in the global advertising market. This opportunity is enormous and there will be multiple winners.

3 I believe Snapchat has another large opportunity in special filters, sponsored or (especially in Asian markets) for-pay. Filters are actually wildly fun to use and are similar to the sticker products in other messaging apps like Viber and LINE.

4 That Snapchat's original and primary use case is one-to-one messaging actually allays the risk of the user growth problem that Twitter has developed. People join Snapchat with only a small network and can contribute meaningfully immediately. Twitter, while an immensely clever service of which I am a huge fan, still takes more after traditional notions of one-to-many broadcasting. It stands to reason that Snapchat, in a matter of years, could be bigger than Twitter.

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