Snap’s Challenge: How to Grow Without Getting Awkward

See the original article here in Wall Street Journal 

When the company behind Snapchat hatched plans to make money from its popular messaging app, it told advertisers their ads would only appear beside content curated by people.

Now, Snap Inc. SNAP -4.92% is in a tricky spot. To boost revenue, the 6-year-old company will ultimately need more of the tailored packages of pictures and videos, called Stories, advertisers prize. Expanding its offering using only editors could be a slow and costly effort, but letting computers do the work would eliminate the human touch that has helped Snapchat stand out.

Ads accounted for nearly all of Snap’s $149.6 million in revenue in the latest quarter, which surged from a year earlier but declined sequentially for the first time.

The Venice, Calif.-based company gets ad revenue from several areas, including publisher content and sponsorships. While Stories is a smaller share—it could amount to more than a quarter of ad revenue this year, Barclays PLC estimates—it is the lever Snap has the greatest control over.

Snap created Stories four years ago to take advantage of the steady stream of pictures and videos people send in private, disappearing messages called Snaps. By allowing users to stitch Snaps together into a narrative arc that could be shared publicly for 24 hours, Stories showed how Snapchat could be more than just a messaging app.

More important, it gave Snap a place to showcase ads. Unlike Facebook Inc. andTwitter Inc., Snapchat doesn’t have a content feed optimized by algorithms. And it doesn’t show traditional ads with most of the 3 billion Snaps.

Facebook, by comparison, pulled in $7.86 billion in ad revenue in the first quarter, driven by ads placed in the news feeds of its 1.28 billion daily users. Twitter had $474 million in ad revenue and 328 million monthly users in the first quarter.

With its stock falling more than 25% since the company’s first earnings report and briefly touching its IPO price of $17 on Thursday, Snap is under pressure from investors to prove its new form of advertising will grow. “Snap might be able to scale with human editors, but it will be labor intensive and won’t make much money,” said Pedro Domingos, a professor of computer science and engineering at the University of Washington who wrote a book on machine learning.

In the first quarter, Snap editors created more than 450 Stories, called Our Stories, chief strategist Imran Khan said on an earnings call. While Snapchat’s 166 million daily users also can create Stories that carry ads, those don’t have the ability to go viral. Users see Stories from editors and people they follow, and Snapchat has no equivalent to a “share” or “retweet.”

Snap doesn’t talk publicly about its process for curating Stories, but former employees say about 50 people scan videos—as many as 100,000 a day—to piece them into narratives and weed out inappropriate content. Workers try to focus on positive Stories, they say.

At a time when competitors including Alphabet Inc.’s YouTube, Twitter and Facebook are grappling with how to handle inappropriate material, curation lets Snap position its content as high quality.

“There is a degree of safety for brands with Snap’s human curation,” said Chris Paradysz, co-chief executive of the digital-marketing firm PMX Agency. “How that scales is everybody’s head-scratcher.”

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