Snap Goes Long on Ads and Longer on Words
Just in case you don't want to read the entire 4,000+ words Evan Spiegel pours into his letter to Snap employees, I'll summarize some key parts below in a mere 2,500 words. In terms of such memos, it's a pretty good read, if a bit meandering. But there are a few gems. For example, if you make it about halfway through, you'll be rewarded with the following:
Our product strategy has been inspired in part by In-N-Out Burger. In-N-Out has developed a loyal following by using high quality ingredients, focusing on doing a few things exceptionally well, and obsessing over customer satisfaction to deliver an excellent customer experience. Their hamburger, cheeseburger, and Double-Double are our Snapping, chatting, and watching Stories. You can decide which parts of our product are the milkshake, fries, and secret menu. We’ve learned the benefits of focusing on our core product experiences and making them truly great, and this year we intend to double-down on what is working.
That was not a comparison I was expecting, but I sort of like it! Spiegel is implying that while others in the social space may be larger, like, say, McDonalds is larger than In-N-Out, Snap is going to continue to focus – and he does mean focus – on doing a few things well with the best "ingredients". Oh yes, and customer experience. I might note that while like any red-blooded American (well, at least those who have lived on the West Coast), I do love In-N-Out, and they are a quality meal, they're still not exactly good for you. They are burgers. And fries. And milkshakes. Eat them every day and well... I guess it worked for Warren Buffett?
Anyway, I digress. I appreciate the effort. And it's a nice break from the first half of the post which seems to be almost entirely about the plan to grow Snap's advertising business. That's the real meat – and point – of the missive, of course.
In the age of trillion-dollar tech companies, Snap has sadly become an afterthought. A "mere" $15B company. While Xitter still manages to get mindshare thanks largely due to its flailing about, Snap remains quietly far more massive, and certainly amongst a key demographic: young people. Yet both companies have been struggling to grow as actual businesses. Now that it's private again, Xitter can afford to for as long as Elon Musk can afford to, for better, but really for worse. But Snap needs to grow.
As I wrote a couple weeks ago around the news that both Snap and Meta were closing in on showing off some new AR/XR glasses:
Yes, the problem, as Heath points out, is that Snap doesn't have the core business scale that Meta does, which gives them cover for projects like this (not to mention AI). I get the need and desire to focus on what's next, of course, but if I were Snap, I might instead focus on going after Meta's core business with their demographic advantage (though Meta would say they've snuffed that out), while this stuff remains skunk-works.
If nothing else, they clearly don't have Wall Street's confidence at the moment. And while we can all say that doesn't matter, it does when you're a public company looking to tap the advantages of being a public company. Yes, Evan Spiegel still has ultimate control through voting shares, but what's the point of being public right now? Perhaps they should go private again?
That was a call to yes, focus on the actual business – which is to say, advertising. And again, this letter is basically all about that. While kicking off noting that Snap now has 850M users, is growing time spent, and crucially, is seeing revenue growth pick up again after a couple years of declines, Spiegel doesn't beat around the bush:
You may be wondering why, with all of the progress we’ve made in our business over the last year, our share price performance has lagged the overall market. The answer is simple: our advertising business is growing slower than our competitors. The growth of our digital advertising business is one of the most important inputs to our long term revenue potential, and investors are concerned that we aren’t growing faster.
He goes on to note that the reason for this is the shift from what he calls "upper funnel" advertising (read: brand advertising) to "lower funnel" (read: performance advertising). Snap has historically been pretty good with the former, helping massive companies, like, say, McDonalds, to get in front of their audience. But they've underperformed with the latter, helping SMBs drive specific actions. That has been naturally shifting over time, but the goal is to push that:
As we look ahead to 2025, we need to grow our lower funnel business even faster while simultaneously reaccelerating the growth of our upper funnel business. We’re going to do that by changing the way that we go to market, introducing new ad placements powered by automation, and continuing to invest in our machine learning platform to deliver powerful results for our advertising partners.
When we first introduced vertical video ads they were a novel and unique offering, but today this format has been embraced by most of our competitors. That means vertical video is less differentiated than it once was, and despite our unique and unduplicated reach in many of the world’s largest digital advertising markets, we need to further evolve our ad products and strategy to stand out. Unlike our competitors, we offer a lot more than a content platform. People use Snapchat to communicate with their friends and family, use our camera and Lenses, peruse their Memories, see what their friends and family are up to on the Snap Map, and more. Despite the many and differentiated ways that people use our service, we’ve historically focused our go-to-market efforts on the vertical video ad format within our content offerings. There is a significant opportunity to better surface insights based on the unique ways that people use Snapchat, generate actionable recommendations for advertisers, and deliver better outcomes by leveraging new ad placements across our service.
That's a long-winded way of saying that Snap is going to start putting ads in the chat inbox and on Snap Map. This is big news because historically, Snap has shied away from advertising in both places, which are highly personal. But while reiterating over and over again that they're not going to read your messages and only going to surface such ads in a "privacy-safe" way, Snap is finally going there.
They'll also be offering up new data and insights to advertisers, presumably based on market feedback about their products to date. Again, Spiegel tries to make it clear that they'll be more privacy-focused in doing this, implying that their competitors (read: Meta) are less focused on this aspect, but it's still advertising. This is a very fine line Snap has to walk.
Still, all of this is going to be very welcome news for advertisers and, presumably, Wall Street. Though they may want to see actual results before knowing if they can trust Snap's newfound commitment to growing their actual business.
Beyond the birthday, Spiegel undoubtedly also wanted to get this message out ahead of their Partner event in a couple weeks because there, much of the headlines generated will undoubtedly be about whatever newfangled XR hardware they show off, as mentioned above. He waits until the latter portion of his post to dive into this aspect of the company:
Despite our extraordinary efforts to make the smartphones we use every day better by introducing vertical video, ephemeral messaging, Stories, Lenses, and more, we continue to bump up against the limitations of screens. Smartphone screens distract us from the real world, require us to use small touchscreens to express ourselves, and aren’t designed to be shared with friends. That’s why we’ve been working to build augmented reality glasses for over a decade. Glasses are already worn by billions of people and allow us to interact with the real world using see-through lenses. As Alan Kay said, “People who are really serious about software should make their own hardware” and we’ve been focused on enabling extraordinary new software experiences brought to life through Spectacles.
Our efforts to build Spectacles are part of what the business school crowd calls Blue Ocean Strategy, a concept introduced by W. Chan Kim and Renée Mauborgne that describes new, unknown market space where there is no competitor and demand is created rather than fought over. Blue Ocean Strategy plays to our strengths as an innovator and leader in augmented reality. Interestingly, Kim and Mauborgne find “large R&D budgets are not the key to creating new market space. The key is making the right strategic moves. What’s more, companies that understand what drives a good strategic move will be well-placed to create multiple blue oceans over time, thereby continuing to deliver high growth and profits over a sustained period. The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action.” Or, in other words, a product of things that are under our control.
This framing sounds almost Zuckerbergian (though Spiegel has always been far more eloquent and thoughtful in his messaging). But unlike Zuck, this isn't necessarily anti-Apple as much as it's pro-moving-away-from-the-Facebook-comparison. Of course, that's not helped by the fact that Facebook is now "Meta" as part of the same attempt to pivot away from smartphone-based social media.
Today, the market for augmented reality glasses is nascent. While we continue to differentiate and win share in the highly competitive market for digital advertising (a “red ocean”), we are investing in creating augmented reality glasses that allow people to interact with computing, the world, and one another in totally new ways. Unlike in digital advertising, where we were a late entrant in a market with established, scaled players, we are a leader in the market for this new type of glasses and in the development of our augmented reality platform that is already used by hundreds of thousands of developers and hundreds of millions of Snapchatters.
Zuck might have a thing to say about being the "leader in the market for this new type of glasses" given the success Meta has seen with their Ray-Ban partnership. But without question, Snap was first here.1 The question is if that will help or hurt them in the long run. As Amazon's Alexa products are proving in real time, being too early can be worse than being late.
Spiegel seems to want to end with another all-American shout-out:
Reflecting on the past two years, I am in awe of our team’s ability to navigate an incredibly challenging environment with resilience and determination. Sometimes the most important thing is survival, and our team and business adapted to major upheavals in mobile advertising, increased competition, international conflict, and a challenging and volatile macroeconomic environment with interest rates at their highest levels in more than two decades. Former USA and Duke basketball coach Mike Krzyzewski, known as Coach K, talks about the importance of leaders turning bad things into something that will work for the team. He says, “Don’t worry about losing. Think about winning. In other words, even when you have a loss, you must ask yourself, ‘What is good about this? How can I turn a defeat into something that works for us?’” When I think about our teams and leaders that have made the biggest impact over the past two years, they have always focused on creating opportunities and finding a way to win.
Coach K and In-N-Out in one post? Nice. But that's also not really the end as Spiegel keeps right on going, talking about yield curves and the recession indicators, debt levels, tariffs, taxes, regulation, compliance, the upcoming presidential election, and even calling out TikTok by name in noting that they or may not be operating in the US in the coming months.
In short, we must continue to expect the unexpected. The uncertainty we’re anticipating around the world further emphasizes the importance of diversified revenue streams including an advertising business serving a large number of advertisers bidding against lower funnel, direct response objectives, and subscription revenue from Snapchat+. It also means that we are investing conservatively against a baseline plan that assumes modest ad revenue growth, while we work towards higher growth rates. This means that in a downside scenario, we are still well positioned to generate free cash flow with our current cost structure. We’ve also taken steps to further fortify our balance sheet with more than $3 billion in cash and marketable securities and no meaningful debt maturities until 2027. We believe that this conservative approach allows our team to focus on driving the long term growth of our business without having to worry as much about external volatility.
You hear that, Wall Street? Don't worry about us.
Okay, so that must be the end, right? Nope:
One of the consequences of constrained resourcing in our functionally-organized business is that leaner teams must work even more closely together to get work done, which makes them more prone to conflict. This is especially relevant as we have worked through the enormous challenges of the past few years, where adverse outcomes make it harder for us to take accountability for our own actions, and easier to point fingers and blame others. It’s never been more important to clearly and rigorously prioritize our highest impact initiatives, and take shared goals across teams to drive more alignment.
What on Earth? This would seem to be a shot across the bow of the employee base for infighting and dysfunction? We certainly don't hear about such internal turmoil as much as say, OpenAI, but clearly it's there. Spiegel urges his company to read the book Fierce Conversations and learn how to more effectively communicate and operate. It's all a bit "disagree and commit" but whatever.
He finally, mercifully, actually ends with a reminder – seemingly to both employees and to Wall Street – of how far they've come as a public company. And quotes Coach K yet again. Now for the hard part. I'll go ahead and quote another sports legend, a far more divisive one: "Just win, baby."
Or go private trying.
Two more things: there are a few mentions of "AI" but mainly in the service of helping either creators or advertisers, which is interesting given the current hype cycle. Recent research about the impact of social media on mental health and wellbeing gets more breathing room, namely in that Spiegel highlights a few positive call-outs about Snap in what is otherwise a cesspool of negativity.
One last thing: Spiegel also hints at a new, "simplified" version of Snapchat currently in testing. Then again, we've been down that road before...
1 Well, I suppose Google was actually first, with Glass. But we won't talk about that disaster.