Snap has released its quarterly earnings report and its stocks being punished as a result. Both the earnings report and the reasons for numerous downgrades by analysts are being covered in detail in the media, but perhaps it’s time for the business to face a hard truth.
The idea is good and commercially viable, but the business strategy is poor.
You see, Snap – whether you like it or not – is an effective social media platform for consumer businesses. Statistically, users spend more time on the platform than most other social networks and revisit more regularly also. This consistent interaction is ideal for anyone targeting Snap’s core demographic – millennials who are highly social and interactive online. Much has been made of the fact that the platform isn’t perfect for businesses to advertise on, but that is entirely beside the point – young people have plenty of money to spend also.
So, if the problem isn’t with the platform itself then where is the issue?
A clue lies in businesses decision to optimistically purchase a ludicrous amount of Snap Spectacles based on nothing more than solid presales and good feelings. The result is warehouses packed with unsold stock and an enormous hole in the balance sheet where money used to be. This was a bold, brave decision that would have been extraordinary had it worked; but Wall Street gets nervous when businesses guess. Choosing to over-purchase was an immature and foolish move by an inexperienced senior leadership team still patting themselves on the back for building an important business.
Any experienced practitioner would have reevaluated that decision, along with Snap’s biggest problem – its business model.
Unlike Facebook, Snap doesn’t have its own physical infrastructure for hosting. Instead, it forks out billions of dollars to Google, essentially renting servers instead of servicing their own. This isn’t a bad idea, except that it goes against Snap’s user habits. Again, the businesses biggest advantage is that users spend more time on the platform, more regularly. Through using someone else’s infrastructure, the business actually ends up paying more when its users do exactly what it wants them to do. In other words, the more people that use the platform, and the more they use it, the more Snap’s costs will increase.
This is why Facebook made the decision to be its own host, and take the short-term cost hit to create sustainable and predictable outgoings – something that a publicly listed business is almost obligated to do.
Luckily for Snap, it’s not too late. Their reputation is in tatters, but if a new senior leadership team can be introduced and make a series of sensible, predictable decisions, then there is still time to plug the holes in the leaking ship.