I recently was reading a leaked email written by Twitter's current CFO, at the time representing Snapchat's investors, to Snapchat's CEO which dissected Facebook's recent earnings announcements. It's clear from the mail that Snapchat's investors view Facebook as the benchmark when it comes to the size of their potential audience as well as revenue. This comparison is what fuels Snapchat's sky high valuation despite close to zero meaningful revenue.
Native Ads, User Intent and Facebook as the Mobile Unicorn
My day job is building an advertising platform for advertisers who want to spend as little as $50 a year to as much as millions a year advertising on Microsoft & Yahoo properties. To have any chance at being good at building a digital advertising business it is important to find the sweet spot between what advertisers want and what users want. The most successful digital advertising platforms that have found this sweet spot in the form of native ads. My definition of "native ads" are ads which match both the form of the content of the site/app and user intent when using the product.
Google search ads is the original native ads platform. Search ads don't just match the look of regular search results but also match the user's intent of finding the most relevant content given their query. I recently donated my wife's decade old car to Make-A-Wish foundation after performing a search for "donate car tax deduction". The ad I got in the search results from Make-A-Wish foundation was actually the best result for me as a consumer and Make-A-Wish foundation got a free car for their auctions as a result of their ad spend. The very definition of win-win.
Facebook has similarly gotten this right. I launch Facebook a couple of times a day seeking minor entertainment from the tiny bouts of bored that fill the day. Facebook shows me ads for 4.5 - 5 star rated mobile strategy games and news about super hero TV shows & movies because I play Clash of Clans and click on all content from Comicbook.com religiously. As with Google, my needs as a consumer are in perfect harmony with the goals of their advertisers.
Where Facebook cranks things up to 11 is that they have figured out how to make more money from mobile users than from desktop users. This is pretty much unheard of in the digital world where the meme is that offline dollars became digital dimes on the desktop web and pennies on mobile. When it comes to mobile ad revenue Facebook is bordering on a mythical creature.
Reddit vs Instagram: A Different Benchmark
Instagram has about 300 million active users and is projected to make about $700 million this year. One might then assert that $2 a user is a reasonable target for a social media app that is light on ads. Heck, I honestly haven't seen an ad on Instagram outside of screenshots in news stories about ads on Instagram. Reddit is a popular social media site that has about half the users of Instagram with about 160 million active users. How much do you then think they made last year? $350 million? $175 million? $100 million? $80 million?
Nope. The answer is $8 million. That's 5 cents a user.
What Reddit has found out the hard way is that their advertising doesn't fit natively into their platform.Their ads often don't match the form of the content and when it does, it doesn't match user intent for what they want out of Reddit. On the other hand, people go to Instagram to see beautiful photos. Beautiful photos from brands they've expressed an affinity with via Facebook or Instagram's social graph are the epitome of a native advertising slam dunk. The results advertisers have seen speak for themselves.
Is Snapchat like Reddit or like Facebook?
This brings us back to Snapchat. Snapchat's original product is actually quite bad from an advertising perspective. When you launch it to send messages you start directly in the camera so no place for ads. Secondly, ads into the user’s inbox of received messages or as part of message viewing would be extremely disliked by users and isn't aligned with user intent.
Snapchat has realized this and the majority of their new features have been about changing user intent around Snapchat. Features like discover & stories (which has since morphed into Snapchat permanently having programmed content in your story feed) are about creating consumption experiences that are more aligned with being good surfaces for delivering ads compared to its original messaging product.
However from what we can tell Snapchat hasn't cracked the native ad nut and when I first saw their "sponsored stories" product, it reminded me a lot of Reddit's sponsored stories product. So it wasn't surprising to learn they cancelled the product last week and fired the guy behind their ads program.
Bottom Line: When I look at Snapchat I see a lot that looks like Reddit when it comes to their ads business not Facebook. In fact, I think it's more likely one could turn Reddit's business into a financial powerhouse with proper execution than Snapchat's.
Facebook: The Digital Ads Chameleon
As a post-script, one other impressive point about Facebook is how malleable their product is from an ads perspective. At one point in time, the Facebook feed was all about social games and they made a large chunk of their money from getting 30% of Zynga's transactions on their platform. Over the past year it’s all mobile app install ads but they've already started the long game to switch to stealing ad dollars from TV & YouTube.
A few years ago, I remember reading about Facebook plan to have auto playing video ads fro articles like Facebook Autoplay Ads Won't Be As Bad As You Think (But Everyone Will Still Hate Them) and thinking that this would be a very jarring experience in their product. However over the past year or so, the news feed has been pumping a heavy diet of auto playing videos from my friends to the extent that I’m now used to auto playing videos in the news feed and honestly can’t distinguish auto playing video ads from auto playing viral videos posted by my friends at first glance. This is the holy grail that Snapchat needs to achieve to be worthy of using Facebook as a benchmark for its valuation but unfortunately they do not have a canvas as malleable as the Facebook news feed or even the Twitter time line.
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