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Snap Stabilizes. Next Step: Sell Ads Without Being Creepy.

Shira Ovide

(Bloomberg Opinion) -- Snapchat’s ability to thrive boils down to this question: Can it close the gap with Facebook without becoming Facebook?

Investors in internet companies have tended to fixate on whether the companies can keep pulling in more people to spend more time with their online hangouts. Those metrics are watched extra closely at Snapchat for signs of whether its generally young fans are drifting away to Facebook’s Instagram, YouTube, TikTok, Fortnite or other internet distractions.

But as parent company Snap Inc. grows up, it has sensibly said it wants to increasingly focus on generating more money from the people who choose to spend time on Snapchat. The question is both whether Snapchat can become an effective internet money-making machine and whether it can do so without following the Google and Facebook model of increasingly invasive internet surveillance.

Snap, so far, has taken steps in the right direction, but it has a long way to go — if it can ever get there.

In a disclosure of its third-quarter financial results on Tuesday, Snapchat reported a second consecutive quarter of relatively steady growth in the number of users and said it expects a similar rate of gains in the fourth quarter. Revenue jumped 50% from a year earlier. In its most lucrative domestic market, Snapchat’s growth in average revenue from each user continued to pick up speed. This is all good. (Snap shares fell in after-hours trading, perhaps reflecting worries about a slightly lower-than-expected revenue forecast for the fourth quarter.)

As analysts have expected, CEO Evan Spiegel said in a conference call script that Snap is on a path to the company’s first positive number in earnings before interest, taxes, depreciation and amortization after stripping out more costs such as stock compensation. It’s kind of profitable, with an asterisk, but it’s an important milestone now that the mood has turned sour for wildly unprofitable young companies.

The company’s shares have rallied this year — though they remain below the price at which Snap sold stock in its March 2017 initial public offering — as it recovers from mostly self-imposed missteps. It now seems that Snapchat’s app is stable; the company continues to come up with fresh and fun ideas; it is no longer focused on 15 contradictory priorities; and it is restoring credibility with its fans, partners and companies that want to pitch to Snapchat’s largely young users.

Snapchat knows what its financial future could look like if it does everything right. That is, it could look like Facebook, which honed the model of turning people’s time and attention into revenue from pitching ad messages. Yes, newspaper, radio and television did the same thing, but Google and Facebook have played this tune on an entirely different scale. Those companies are both a model of what Snapchat could become financially and a cautionary tale.

Snapchat generated an average of $2.12 of revenue for each of its daily users in the third quarter. The figure at Facebook was $10.64 in the second quarter.(1)The gap is not a surprise, given the relative immaturity of Snapchat’s advertising sales machine and its stumbles.

To close it, the company has copied sensibly from Facebook, giving a retailer, for example, options to pitch a specific handbag from its catalog to Snapchat users who might be interested. Snapchat needs to offer more options like this to businesses, prove that ad messages translate into sales and avoid annoying its fickle young fans. It’s a tall order.

Snapchat also has to do this without getting too creepy. We don’t yet have a model of an internet company that can be successful without following the Google and Facebook model of sucking up ever-more granular information on people’s habits to fine-tune marketing pitches. Snapchat promises it can make money without being an insatiable data hog in the service of selling movie tickets or sneakers, but that remains to be seen. 

I’m also not sure that, structurally, Snapchat can resolve the division between the features on which users spend most of their time and the features that generate big chunks of the company’s revenue. That division may be a permanent ceiling on Snapchat’s revenue.

For now, stability is a new and welcome look for Snapchat. To continue to fulfill its potential, Snapchat now has to pivot from recovery to a grown-up advertising vehicle while writing new rules for being a responsible internet company. 

(1) Facebook discloses a different average revenue figure based on monthly users. My figure is calculated from Facebook's daily user numbers.

To contact the author of this story: Shira Ovide at sovide@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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