Snapchat's S1

Snapchat filed its S-1 this past week. This means the company will be conducting its initial public offering in the not-too-distant future. You can find the filing here: https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm. Snapchat's S-1 is relevant for a variety of reasons, among them being its substantial mindshare and influence in the digital advertising space. It also may be the first time the phrase "Users barf rainbows" showed up in an S-1.

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The high level facts are: 158M daily average users, 60% create content daily, 25% post to their story daily, and the average user opens the app 18 times a day for 25-30 minutes of total engagement. 1/3 of their users use their lenses every day and 75% of their users are in North America or Europe. They had ~$400M in revenue in 2016 vs. ~$60M in 2015, making $1.05 / user in 2016 ($2.15 for North American users) vs. $0.31 in 2015 (compared to ~$20 for Facebook). Overall, they lost ~$500M in 2016, and ~$375M in 2015. They committed $2B to Google for cloud infrastructure over the next 5 years and employ nearly 2,000 people.

Snap makes nearly all of their money from advertising. It is relatively unique in that the team that designs their consumer products also designs their ad products. This means, for example, that the company's core product focuses on vertical video - as do their ad products. Their ad products also emphasize 3rd party measurement, including partners Moat, Innovid, Sizmek, and Google - with a lengthy section in their S-1 dedicated to viewability, which highlights its importance in the industry. Their ad products include mid-roll ads, sponsored lenses, and sponsored geofilters. Snap's decision about how they monetize strongly supports TripleLift's mission. While users may want a world without ads, consumer behavior isn't such that they're willing to pay enough to adequately compensate the publisher - as a result, creating effective, user-centric advertising is simply the best approach (after having tried a few others). The company focused on native products that were deeply integrated into the product, such as sponsored lenses, sponsored geofilters - and midroll ads that captured the ethos of the app and its vertical video orientation - 60% of which are viewed with audio on. 2.5 billion videos are viewed everyday on Snapchat, and the company views it as the most scalable way to grow their revenue.

Snapchat innovates on its ad formats, and as a result, has the challenge of getting advertisers to adapt to its creative requirements. Originally advertisers default to just using repurposed TV ads. But by working with their partners to create appropriate and engaging content that delivered results, the company has been increasingly successful getting brands to create new assets for their higher-performing standards. This means brands will be creating more and more vertical video that matches the somewhat-irreverent nature of Snapchat. Because brands will be creating vertical video in increasing quantities, 2017 will be marked by much more vertical video generally - not just for Snapchat, which may present an opportunity for TripleLift (h/t Jen Lee). The challenge for Snapchat's creative is similar to that for programmatic native advertising - the changing creative requirements are a hurdle that advertisers are slowly but surely working through, with the promise of significantly higher performance - but it shows that changing creative standards are difficult for everyone, even Snapchat.

Snap is exceptionally bullish on mobile advertising, which they predict will grow 3x to ~$200B in 2020. This growth will be powered specifically by people shifting their attention from TV to mobile deices. The trend is more pronounced among the younger demographic (18-34), which is the core of Snap's user base. They spend up to 35% less time watching TV than the mean. The company is acutely aware that it over-indexes among this younger crowd - for better or worse. Snapchat's core bet is that it could create a viable replacement for the reach and frequency previously provided by TV to reach this core demographic. Those below 25 engage with Snapchat at an exceptionally high level.

Snapchat's rate of user growth slowed materially in Q4 of last year - it may be that Instagram copied their product so successfully it stole Snap's momentum, but Snap blames it on technical hiccups in product features that they launched. Their primary competitors in their eyes are social networks, but also include media companies. The company views interaction of content directly through a partner's website as an implicit form of competition - underscoring the ongoing balkanization of content consumption channels we discuss regularly at TripleLift. Snap seems focused overall on simply driving user growth and user engagement. Their publisher tools are an important part of the content that creates user engagement on the platform, and it is viewed in that light - they state in their S-1 "While our Chat Service brings people back to the application frequently to communicate with their friends, our Storytelling Platform provides a unique variety of personal and professional content for our community to enjoy. As a result, our Daily Active Users spend an average of 25 to 30 minutes on Snapchat every day." Publisher content also provides a means for additional context for ads, as opposed to being somewhat randomly interspersed among individual user content.

Finally, in the world of startups, Snap's capital structure is relatively unique. The shares being sold in the IPO have absolutely no voting power. While some shares sold previously to investors have some votes, nearly 90% of the voting power is held by the two co-founders. Alphabet and Facebook have relatively similar voting concentration among their founder(s), but the common stock in both at least has some, albeit quite limited, voting power. This will be an interesting test of the receptiveness of the public markets to this structure - it is the first time in history that non-voting stock is being sold in an IPO in the US.