After a difficult year for operations and finances, Snap Inc. announced in late June that its paid subscription option had hit 4 million users.
Snap is one of many social media companies affected by a jarring decline in the digital advertising market and, while it celebrates the paid-subscriber milestone, analysts say that this revenue stream is unlikely to move the needle much.
The company launched Snapchat+, a paid addition to its signature app, in June of last year. It said that for $3.99 per month, Snapchat+ “offers access to exclusive, experimental and pre-release features.” The number of paid users has grown slowly but steadily: Snapchat+ collected 1 million subscribers in its first two months, but didn’t hit 2 million until January.
Rocky year
The Santa Monica-based tech giant has seen several rough quarters. It laid off 20% of its staff last summer, and earlier this year reported that first-quarter earnings before interest, taxes, depreciation and amortization had decreased 98% year over year.
Revenue for the first quarter was $989 million, down 7% from the first quarter of the prior year. The company said its internal forecast for second-quarter revenue was $1.04 billion, which would be a quarter-over-quarter growth of 5%.
Analysts say that with Snapchat+, the company is looking to diversify its revenue streams and prop up losses from decreased ad revenue. Compared to 4 million Snapchat+ subscribers, the app has 383 million daily active users and more than 750 million monthly active users.
“That 4 million might be a significant number to some, but in the grand scheme of things, I don’t know that it really is making that much of an impact,” said Scott Kessler, the sector lead for technology, media and telecommunications at Third Bridge Group. “They absolutely are trying different ways of monetizing … with different levels of success, but I don’t know that anyone, looking at the numbers for what they are at this point, would suggest that this has been a resounding success.”
In its first quarter report this year, Snap specifically pointed to decreased ad revenue from a “challenging advertisement demand environment,” and said that growth in its Snapchat+ business had partially offset those losses.
“The year-over-year decline in our advertising business reflects a macro-operating environment that has weakened considerably over the last year,” Snap wrote in its investors report.
The company added that decreased ad revenue for the first quarter was due to changes made to its ad platform intended to drive more click-through conversions. It said that, while it will take time for those ad platform improvements to translate into growth, many existing ad partners adjusted to the changes over the first quarter, and some new ad partners found success.
“That said, there continues to be a small number of our top advertising partners who have not yet recovered the volume of actions they were previously driving on our platform,” Snap wrote. “This dynamic is visible in our growth rate by region, where revenue declined 16% year over year in North America, where spend from these top advertisers is most significant.”
Snap’s stock was up in June and early July. The company’s shares, which trade on the New York Stock Exchange under the symbol SNAP, were trading for $13.51 at close on July 13, up 70.8% from a seven-month low in early May.
Advertising decline
Snap isn’t the only social media platform reporting a struggle with advertising: after a pandemic-led spree, digital advertisers just aren’t spending as much as they were a few years ago. Terry Kramer, faculty director at the UCLA Anderson School’s Easton Technology Management Center, said the economy is beginning to soften and consumers have less spending power.
“(Consumers) are just not buying as much and so advertisers … are having to kind of make measured decisions about when they’re going to advertise,” Kramer said. “Because, if you put out a lot of spending and advertising and you’re not getting commensurate adoption … then the customer lifetime value of that digital marketing campaign has gone down.”
Total spending in the digital advertising market has not gone down, but growth has decelerated significantly: Insider Intelligence reported that digital ad spending growth last year increased 8.5%, compared to 29.8% in 2021. In a January analysis, Forbes reported that this year will not be the year for this growth to recover, though Insider Intelligence forecasted digital ad growth of 9.5% for the year.
Kessler pointed to the fall of Apple Inc.’s Identifier for Advertisers system, or IDFA, as another hit to advertisers. IDFA assigns users with anonymous IDs that provide advertisers with data to create more personalized content. However, starting in early 2021 with the release of iOS 14.5, Apple made IDFA an opt-in feature, which Kramer said reduced the customer lifetime value of many marketing campaigns. Kessler added that limiting IDFA has thrown a “wet blanket” on the monetization of digital and social media.
“Companies are not as able to identify, target and monetize users as they did prior to IDFA, and there are a lot of reasons for that,” Kessler said. “But the most obvious is that they simply just don’t have access to the granular data that can make their advertising solutions more effective and valuable.”
As digital advertisers tighten their budgetary reins, they are likely to spend resources on more reliable platforms for marketing, said Jasmine Enberg, an analyst at Insider Intelligence. Enberg said that while Snapchat is more than a decade old, having launched in 2011, it’s still a “tier two” player for many advertisers.
“We’re in the midst of an advertising market slowdown, and what happens in those instances is that advertisers tend to turn to tried and true and essential platforms,” Enberg said. “What that means is Meta and Google, for example. Snapchat is …an experimental player for many advertisers still, and those tend to be the first types of platforms that get cut from budgets.”
Growing offerings
Snap isn’t the only company trying to diversify its income streams by charging for a previously free application. A so-called Meta Verified subscription, which the company said provides “a badge, proactive impersonation protection and direct access to customer support,” costs $14.99 a month on mobile. For $8 a month, Twitter users can access features such as the ability to edit published tweets, reduced ads, the ability to post longer videos and tweets as well as the coveted, status-defining blue checkmark.
However, Snap has been implementing new models for revenue besides Snapchat+. It established a revenue-sharing program whereby creators who post frequently on their public story can receive payment for the ads placed in between content. Snap said that its investment in the revenue-share program was expected to drag its gross margins down in the short term, but that it anticipated the program would visibly increase those margins beginning in the second quarter of this year.
Asking users to pay for an application that was previously free, or still can be used for free, could be seen as a risky endeavor. Kessler argued that the low cost of $3.99 a month means that the question isn’t whether users can afford Snapchat+, but rather that, with a demographic and age group that are less willing to pay for things online, Snap will need to show users that Snapchat+ is worth the cost.
While Enberg said that Twitter’s premium version originally didn’t offer many perks besides verification, Snap has been integrating new features into Snapchat+ in an effective, enticing way. One example is My AI, Snapchat’s new generative AI chat bot that rolled out in February and was originally available to Snapchat+ subscribers only. In April, My AI was made available to all Snapchat users.
In its recent revenue report, Snap also mentioned the launch of its first software as a service offering, called Shopping Suite, which helps retailers use Snapchat’s AR platform to promote sales.
“Diversifying our revenue growth is an important strategic initiative, and we believe our leadership in AR technology provides a strong foundation to build enterprise services and deliver a more holistic solution for businesses who are already using our AR technology for advertising,” the company wrote in the report.
Enberg said she thinks that Snapchat+ on its own is unlikely to have major impact on Snap’s bottom line, with Kessler adding that Snap likely has “bigger fish to fry.”
“I do think that there is a ceiling to how many people will sign up to Snapchat+ … but it’s really smart for it to be diversifying its audience, and it has an incredibly loyal user base,” Enberg said. “That’s one thing it’s always had going in its favor, and Snap also does not lack for innovation. It’s just a matter of being able to turn that innovation into the revenue that it has been struggling with.”
