As is well-known by now, Snap Inc. flopped for its first-ever earnings call - hard.
The social platform missed revenue targets by about $9 million, or roughly 6%, disappointing many optimists on Wall Street and sending the stock plummeting to about $17 per share, near its initial listing price.
Snap also reported a net loss for the company, amounting to around $2.2 billion, which was largely due to bonuses and payouts from the IPO. However, there are other troubling factors that surely contributed to the miss and will plague the newly public company if it doesn't make some key changes first.
A Change in Perspective
Snap CEO Evan Spiegel still labels his operation "a camera company," which is problematic for a few reasons.
The company's core offering, Snapchat, is more than about reinventing the camera as we know it. It's really about transforming the way people interact with each other through their cameras - in other words, a platform.
Until Spiegel and his leadership team stop treating their core value proposition as a company like a product company, and instead begin treating it like a platform company (think Facebook and Amazon), the company is bound for a series of missteps and missed earnings calls.
While Snap is perpetually moving to break new ground with the business and its app, there are still transferable lessons to be learned from some of its platform predecessors.
Snap Needs an Attitude Adjustment
Since August 2016, Snapchat has seen its user growth to drop precipitously, by 82 percent since its competitors at Instagram launched a similar feature. Stats like these inspired a significant skepticism at the time of its IPO.
Even though Snapchat still retains a significant pool of users from Generations Y and Z, it's failing overseas. Instagram is aggressively expanding outside of North America, while Snap is posting very poor international growth numbers.
Snap needs to market itself better and look to other countries if it hopes to capture enough user attention to generate the revenue it needs to justify its overhyped IPO and bloated valuation.
Another target for business reform is the attitude towards outside innovation.
Users can submit their own geofilters (the overlays for photos usually relevant to a location or event). However, the submission guidelines read a bit strict and prohibit businesses from submitting, which could be a new source of revenue.
It's clear that Snap is very concerned about quality of the user experience and doesn't want to be a home to hackneyed clearance sale advertisements, but there's a huge opportunity (and pile of cash) the company is simply leaving on the table.
Another squandered opportunity is off in the future, but getting closer and closer: the market for augmented reality (AR).
It has been widely speculated that Snap would break open the market for AR given the nature of its app and the camera company announced as much - at the same time as Facebook's reveal at its F8 conference.
The key difference in the social networks' approach is this: Facebook opened its Camera Effects system to outside developers, while Snap is keeping World Lenses in-house for the foreseeable future.
This is not a smart move on Snap's part. Assuming the overhead costs for producing everything AR in World Lenses will sap company resources that would be better spent reducing server usage and making improvements to the app.
Meanwhile, Facebook only needs to produce a small batch of AR components for Camera Effects to take off. Once developers understand the processes for building on the platform, they'll take off like a rocket building new things, just as was done when Facebook itself became a platform for apps and games (remember Mafia and Candy Crush?).
Facebook will scale its AR play significantly faster than Snap and define how people interact with it, taking a dominant position in the market many had predicted Snap could own.
Wringing Ad Dollars From a Stone
Another huge issue for Snap is its average revenue per user (ARPU). Spiegel has said he doesn't worry about growing to Facebook's size, but his focus is instead on increasing the ad dollars earned for every user, on providing advertisers quality over quantity.
Unfortunately for Spiegel and his vision, ARPU actually declined for the first time ever during Q1 to $0.90. By contrast, Facebook collects roughly $19 per user annually and collects significantly more user data than Snapchat, so it looks like a long road for Spiegel and his team to reach anything resembling Facebook's success.
One significant boon for the company is Snapchat Shows, which is short-form content produced specifically for Snapchat and not found anywhere else. Providing quality and exclusive content is a smart move to shore up its user loyalty and potentially boost growth, but it's still an expensive process to buy and produce these shows.
It's already too late to change existing partnerships, but Snap needs to look at acquiring content without purchasing it and offering better ad revenue-sharing agreements with the content creators.
Snap needs to focus on creating a high-quality network of content creators that aren't paid upfront, similar to what YouTube assembled and Vine halfway attempted. Most famously, DJ Khaled would accrue over 3 million view for any story he posted on the platform.
Alas, the company failed to properly embrace the musician or offer him a revenue-sharing agreement based on his popularity, which prompted him to shift his attention to Instagram.
If Snap fails to properly leverage a network of creators, it could suffer problems similar to what prompted Twitter to kill Vine and the company will be perpetually saddled with an expensive process for producing content.
2017 is already looking like a rough year for Snap. A rocky IPO and even rougher earnings call highlight a lot of issues that company should confront if it wants to succeed. Here's hoping Spiegel opens his eyes in time to spare his team further humiliation.