Santa Monica-based Snap Inc. is enhancing its generative chatbot, called My AI, through a new partnership with Microsoft Corp. As Snap leans into artificial intelligence, it is shutting down a previous investment in augmented reality.

My AI is now using Microsoft’s Chat Ads API to expand advertisers’ access to Snapchat users. Until now, if a user asked My AI “What should I have for dinner?”, the chatbot could respond with a cuisine idea or meal suggestion. With Microsoft’s technology, the chatbot could answer with a sponsored link to a local restaurant or grocery store.

“Sponsored links connect our community with partners relevant to their conversation, while helping partners reach Snapchatters at the moment they have indicated potential interest in their offering,” Snap said in an announcement.

Snap announced its partnership with Microsoft about a week before it revealed that Snap is shutting down its AR Enterprises division and laying off 170 employees. The AR division launched in March and was focused on helping other companies build Snap’s AR tools into their own websites and apps. Snap previously laid off about 20% of its workforce, or around 1,300 employees, in August of last year.

“After exploring our options over the past few months, it became clear that it would take significant incremental investment to grow our enterprise offering for retailers and we simply cannot make that investment at this time,” Snap Chief Executive Evan Spiegel said in a note to employees. “The advent of generative AI has made it easier for companies of all sizes to create try-on experiences for their customers and made it harder for us to differentiate our offering. (In addition), our business performance has reduced our capacity to invest in this incremental opportunity as we have had to focus our resources on our core advertising business.”

Spiegel added that some AR Enterprise team members will be kept on, while those who are let go will be provided with severance packages and outplacement assistance.

Snap’s most recent financial report showed a decline in revenue and increased net losses in the second quarter amid moderate user growth. Snapchat had 397 million daily active users in the second quarter of this year, up 14% from the same period last year. The company also announced that Snapchat+, a paid addition to its signature app, had hit 5 million subscribers since launching in June of last year. Growth for the paid option has been slow but steady: Snapchat+ collected 1 million subscribers in its first two months but didn’t hit 2 million until January.

“While we are still far from achieving the revenue growth to which we aspire, we believe that the momentum we have established in community growth and content engagement, the significant improvements we are seeing in return on investment for direct response advertisers and the early growth of Snapchat+ … demonstrate progress and further validate our strategic focus,” Spiegel said.

My AI was made available in February exclusively to subscribers of Snapchat+, consistent with the subscription option’s promotion of “access to exclusive, experimental and pre-release features.” My AI later rolled out globally in April. Snap began testing sponsored links in My AI “a few months ago” and Microsoft said that initial testing demonstrated a “promising” impact on mobile traffic, which led to the service being rolled out more broadly across the U.S.

“Over 150 million people have sent over 10 billion messages to My AI, which we believe makes My AI among the largest consumer chatbots available today,” Snap said in the second-quarter report.

Snap has been particularly focused this year on improving its ad platform as the digital ad market has declined overall. In addition to the Microsoft partnership to boost My AI’s sponsored-link capabilities, Snap chief financial officer Derek Andersen told investors in July that the company is ramping up investment in its ad infrastructure and content-engagement options for users.
“We’re increasingly confident that these investments are a key input to sustain revenue growth over time,” Andersen said. “That said, how the continued ramp in these investments will impact the ad platform performance, advertiser demand and topline growth in the immediate weeks and months ahead is more difficult to predict with precision.”