Social Media & Snapchat
When the Corona-virus arrived and we had to go into quarantine I started to think about social relationships and how they are changing with the social media apps. A famous quote quickly came to mind:
“We shape our tools and then the tools shape us.”
I became interested in social media in general, and Snapchat in particular.
This is a collection of thoughts. The first part is about social media(experiences, message passing and social function). The second part is about the investment case for Snapchat(ARPU&DAUs, Time/Attention is money, Strategy, Advertising platform)
This is mostly about writing things down so that I, and you, can react to it, it can spur new thoughts, discussions, etc.
Social Media
Experiences
We experience life. Either alone, or with someone.
The traditional understanding of this is that we can share experiences with people that are, physically, there with us, or share the memory with people through some medium afterwards.
The new understanding, however, is that we can experience with people that are there, physically, but we can also simultaneously share it with whomever we want through social media apps. And, as previously, we can also share the memory through some medium afterwards.
The key difference is the simultaneous sharing of experiences as they are happening.
This change might be transformative in itself, but I am most interested in how it affects our communication. If we start to share our lives as they are happening, we end up in a state where we are constantly updated, and hence “up-to-date”. Communication that previously revolved around looking back to get “up-to-date” becomes, not surprisingly, “out-of-date”.
On the one hand, we can think of all this “updating” as the communication that is happening. And it might be. But, it is much more interesting to think of this updating as a fundament for communication that can happen atop of this.
It's easy to say what this communication won't be, but it is much harder to say what it will be.
Message passing
About one year ago I wrote “Objects and Processes” where I discussed the difference between object-oriented programming and message-passing processes.
“The structure in the first approach is based on objects consisting of data and functions.
Depicted is an apple and its structure as an object. It contains data about the colour and functions to get or set the colour. In a program there exists many different objects that interact with each other. Another object can get the colour of the apple using the function getColour(). Using the functions, one object can invoke behaviour in another object.
In the second approach, however, the processes only share information.
Two processes are illustrated, the car and the stopping light. Each process uses information it receives to decide what to do. In this example the stopping light shares information that the light is red, and the car has to decide if it should stop or not. In contrast to the first approach, the stopping light cannot make the car stop by directly invoking behaviour. “
We can apply these two approaches to how conversations work. In the first example, there is a person with an experience, and someone has to ask for that information to get “the story”, in normal words: “How was your day?”. In the second example there is a constant flow of information between people where experiences are shared. As the day unfolds, you send and receive updates about the day. To avoid overflow, you have to selectively choose who you send to and receive from.
It is not like we are moving from a world of “object-oriented”-conversations to “message-passing”, but the tools(FB, Snap, Insta etc.) we are adopting are clearly oriented towards “message-passing”. And:
“We shape our tools and then the tools shape us.”
Social function
There are many different social media apps, and from the outside they can all look the same. One way to differentiate the apps is to look at which social functions they are “solving”.
This Triangle metaphor is from Scarcity Status versus Abundance Status by Alex Danco.
It places Snapchat at the bottom with self expression - sharing your experiences and expressing yourself. In the middle we find Instagram, which is about status, showing the best part of yourself, how cool you are etc. And on the top we find Tiktok, which is about showing your talent.
To the left there is an arrow with accessibility, which means that the bottom level is accessible to most, the middle level is less accessible and the top level is the least accessible. At the other side, there could have been an arrow with “# of people”. Ex, you self-express to your friends, you status-signal to a broader group, and if you are talented you can reach the whole world.
The SnapCase
ARPU & DAUs
Last week I did a presentation for the investing club at my university, and I thought I could share the investing thesis for Snapchat.
The Snapcase can be summed up in this picture:
The picture shows ARPU(Average Revenue per User) on the X-axis and DAU(Daily Active Users) on the Y-axis. The picture shows how Facebook, Twitter and Snapchat score on these metrics in North America. Facebook is 16 years old, has an ARPU of 186$ and 195M DAU. Twitter is 14 years old, has an ARPU of 64$ and 33M DAU. Snapchat is 9 years old, has an ARPU of 15$ and 88M DAU.
Snapchat has 249M DAU in the whole world and Global ARPU is 9,24$( if we use the four previous quarters) The ARPU is higher in developed countries, so the global ARPU is, therefore, lower than the ARPU in North America. Below are quarterly numbers, so you have to multiply them by 4 to get the annual number.
As we can see, ARPU in Europe is much lower, and the same for Rest of World. This is both an opportunity and a challenge. On the one hand, if Snap is able to copy what works in North America to Europe and RoW, there is a huge upside. But, it is also possible that Europe and Row are structurally/culturally different from North America, or less monetizable because of regulations or spending power, respectively.
If we multiply APRU with DAU we get Revenue for the whole company. The social media companies are then valued at a P/S-multiple of 10-30. Below are two sensitivity matrices that show the share-price based on various numbers.
The current share price is 41$, up around 50% from 28$ last week. Yet, looking at these matrices, there is a substantial upside to the share price if Snapchat is able to increase the ARPU.
Time/ Attention is money
In the first graph, we see the average time spent by users on Facebook, Instagram and Snapchat for 2016-2021. As we can see, there is not much difference between the three in the absolute numbers. It can, however, seem as though Facebook is on a downward trajectory, Snapchat has stagnated and Instagram is on an upwards trajectory.
On the second graph, we see “Kids’ Daily minutes spent with social & video apps”. As we can see, the numbers for Youtube, TikTok, Snapchat and Instagram have all increased. Strangely, all these “competitors” seem to win at the same time, even though time is zero-sum. There is, however, one big loser - linear TV. (But, sadly, in these Corona-times, the loser might also be actual physical interactions)
One way to think of this is that time spent on an app can be seen as a proxy for how much the app can be monetized. Or, more precisely:
Monetization of an app is a lagging indicator of time spent on an app.
And, as time spent on Snapchat is similar to time spent on Facebook and Instagram, it is possible that the ARPUs eventually converge.
To quickly respond to your counterarguments:
But Facebook ARPU is FB+Insta+Whatsapp +++
Yes. It, therefore, makes sense that the number is higher, but not 10x higher.
The problem with Snapchat is that it is inherently un-monetizable, compared to ex. Instagram. While Insta/FB open to a news feed that can be propped with ads, Snap opens to a camera without ads. It is almost impossible to use Insta/FB without seeing an ad, but easy on Snap.
That is one of the main challenges with Snap. And part of the Snap thesis is a bet that Snap is able to innovate the product and the ads, probably merge them together in the long term.
Strategy
“Our strategy is to invest in product innovation and take risks to improve our camera platform. We do this in an effort to drive user engagement, which we can then monetize through advertising. We use the revenue we generate to fund future product innovation to grow our business” -S-1, 2017
This quote is rather straight-forward. If you are skeptical of how innovative Snap is in its product I recommend comparing how much Snap has evolved its product since its inception compared to ex Twitter.
“In 2019, we will refocus our company on making Snapchat the fastest way to communicate so that we can unlock the core value of our service for the billions of people who have not yet learned how to use Snapchat.” -The Snap Memo, 2019
Imagine you are Snapchat. You have limited cash. You lose money - your cost per user is bigger than your revenue. You need to fund this business somehow so you focus on users with high spending power that can yield a high ARPU.
You are an internet company so your cost per user does not increase as you add on more users, it might actually decrease. So, when you then understand how to monetize your users so that the ARPU becomes higher than the cost per user, it makes very much sense to on-board as many users as possible.
Evan Spiegel wrote this in 2019, and it is, strategically speaking, insane to say something like this if you do not have good reason to believe your ARPU will increase. And it has. From Q3 2019 to Q3 2020, ARPU increased 28%.
It will be interesting to understand the timeline for this, and how Snapchat will execute on it. It is, most likely, a work in progress, and when the results unfold the investing case might already be priced in.
“We are so excited about our progress in AR, content, and our growing platform” -Q3,2020
This one is probably the most exciting one. But it is also very hard to articulate.
On AR I can point you to this article that tries to describe what Snap is building.
A mirrorworld, which can be described as a “digital world mapped 1:1 with the physical world, which we can interact with, experience, and manipulate just like the real world”
From Snapchat: “Now, Snapchatters can join a persistent, shared AR world built right on top of the physical one. You and your friends can step into these worlds together, collaborating creatively and experiencing a whole new dimension of AR.”
Snapchat has premium content in the Discover tab. And without going into detail, this part seems extremely undervalued. (For comparison, the 10 most watched movies on the “streaming giant” Netflix range from 50-100 million viewers)
Advertising platform
Two years ago, Snap decided to focus on building a scalable ad platform. It simplifies the process of making ads, makes it possible to track ROI on spend for advertisers and optimize match-making of ads and users.
In advertising, there is a difference between Branding and Performance dollars. Branding dollars are companies wanting to portray the company in some certain way or making it more recognizable, etc. Spending dollars, however, are companies trying to increase the sale of some certain product. The ads on Snap have mostly been Branding dollars but with ROI-tracking and dynamic ads, more Spending dollars can be invested into Snapchat.
Advertising on Snapchat is relatively new, and many companies have therefore been in a testing-phase with Snapchat. It is, therefore, assuring that companies continue with, or increase their budgets as they get more accustomed to the platform and see results.
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