Good morning,
Two podcast notes:
- Last Friday’s Sharp Tech Mailbag episode covered the China chip ban, AI, the role of audio in consumer tech, and a ranking of which NBA coaches and GMs would make for the best tech CEOs.
- On Dithering John Gruber and I reviewed Apple’s new product releases (which John also covered on Daring Fireball.
As a reminder you can add both podcasts to your preferred podcast player by clicking the links at the bottom of this email.
On to the update:
Snap Earnings
From Bloomberg:
Snap Inc. reported its slowest quarterly sales growth ever, saying that a decline in advertising spending continues to drag on results. Shares plunged 28% at the open in New York, the most since July. The maker of the Snapchat app said third-quarter sales increased 6% to $1.13 billion. That was just shy of analysts’ average estimate of $1.14 billion, according to projections compiled by Bloomberg. The social media company spent the quarter shrinking and refocusing its business, announcing in August that it was cutting 20% of its workforce and slashing projects that don’t contribute to user or revenue growth, or to the company’s augmented reality efforts. The changes were in response to plunging sales, which Snap attributed to a slowdown in marketer spending.
Revenue growth “continues to be impacted by a number of factors we have noted throughout the past year, including platform policy changes, macroeconomic headwinds, and increased competition,” Snap said in its prepared remarks for investors. “We are finding that our advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital.”
Snap’s headline numbers were bad; unfortunately some of its engagement numbers were worse. From the company’s investor letter:
Time spent watching Friend Stories continues to be a headwind to overall growth in time spent watching content, even as the number of Snapchatters viewing Friends Stories has grown year-over-year. We have seen the depth of Friend Stories engagement per viewer decrease, and total time spent watching Friend Stories remains below pre-pandemic levels. We are focused on investing in our content experiences to drive the overall depth of engagement with content on our platform through new products such as Spotlight and content publishers through Discover, as well as ongoing improvements to the user experience and personalization. While we are encouraged by the progress we are seeing from these investments, including 55% year-over-year growth in total time spent viewing Spotlight in the most recent quarter, this growth is building on a lower base of engagement when compared to Friend Stories.
Here’s the problem: Friend Stories is one of Snap’s primary canvases in terms of monetization; the only saving grace to losing this valuable inventory is that advertiser demand (as reflected by auction-determined eCPM prices) fell even faster.
Unfortunately it gets worse: this decrease in engagement is centered in the United States, aka Snap’s best advertising market:
While growth in our global community is helping to offset these headwinds on global time spent, this is not the case in some of our more mature markets. As a result, total time spent watching content in the United States decreased 5% year-over-year as the diminished depth of engagement with Friend Stories was not fully offset by the growth in viewership and growth in time spent with Discover and Spotlight in the US. While depth of engagement with Friend Stories has been a headwind in the US, the number of individual viewers of all content types has continued to grow year-over-year, which we believe is an important input to revenue generation, given the value of incremental reach for advertisers.
Discover (i.e. professionally-produced content) and Spotlight (i.e. TikTok-style videos) are good for capturing more engagement, but they are harder to monetize, at least for now. In part this is because Snap hasn’t really built out any advertising products there — there was a lot of talk about advertiser experimentation, alongside caution about cannibalizing Stores — but also because building engaging short video ads is more challenging: the “I” in ROI (Return on Investment) is much higher. This is a particularly big problem currently given that the “R” is much more of a question mark, thanks to Apple.
What Spiegel Wouldn’t Say
To that end, one of the more disturbing issues on the earnings call, at least from an analyst’s perspective, was what CEO Evan Spiegel refused to say; I’m posting this full question-and-answer just to highlight what isn’t there:
Thanks so much for taking the question. Maybe I’ll do a 2-parter, if I can. I think, first, Evan, what people still want to hear is sort of looking back over the last four, five quarters as Apple made the policy changes they did and the industry has been in this sort of transformative mode over the last 12-plus months, what have been some of the key learnings of where you found the infrastructure and the ad product maybe less well positioned in terms of what’s happened from an industry shift standpoint?
And turning to the forward timetable, you’ve obviously laid out an investment plan to sort of reposition the ad product for the long term. Can we get a better sense of like where you are in the process of repositioning the ad platform for the medium to long term? And how should we be thinking about what the pathway is in terms of headwinds versus tailwinds from a monetization standpoint? Thanks.
Evan Spiegel: Thanks, Eric. Yes. So at a high level, we’re focused on building our business for the long term. And that means that we really put our community at the center of everything that we do, and we innovate to offer products that add value to people’s lives by empowering them to express themselves, live in the moment, learn about the world and have fun together. That long-term perspective is really what informs our strategy as we think about navigating this difficult macro environment that has impacted our advertising business over the past few quarters.
So, we made the decision to reprioritize and focus our investments on our three strategic priorities: growing our community and their engagement; reaccelerating and diversifying our revenue; and investing in augmented reality. And these changes should allow us to drive continued growth in our community while delivering free cash flow even with low levels of revenue growth. And that gives us a lot more flexibility to focus on the long term in an environment where the cost of capital has increased quite dramatically.
There’s a lot of opportunity to generate incremental revenue across our platform, whether that’s our AR platform, Spotlight or the Map. We’ve also been growing our Snapchat+ subscription service, which is another way that we deliver value to our community and allows us to monetize the high levels of engagement that we have across our service.
Operationally, our advertising business has become a lot more technically complex over the past few years as advertisers are working to better measure and optimize their campaigns. That means that we need to drive increased coordination across our sales, engineering and product teams, which is one of the reasons I’m so excited to have Jerry leading these teams as our COO. I’ve already observed a significant change in the way that our teams are working together, and I’m really pleased to see the focus on our advertising customers driving everything that they do.
I mean, tactically, really, that means working to make conversions on our platform more observable and easier to measure, whether that’s more on platform or click-through conversions, improvements to our first-party tooling, third-party tooling and partnerships, ad format improvements, ML and optimization improvements, and of course, continuing to grow our inventory. We saw about an 8% increase in impressions year-over-year in the quarter, which is really a function of daily active users and engagements. And then, as we’re looking to the future, we’ve really tried to make sure that all of our investments are lined up against those three strategic priorities that I mentioned, community growth, revenue growth and AR. And that’s really how we’re going to be working through this challenging environment.
In case it wasn’t clear, Spiegel was asked point blank about Apple and its App Tracking Transparency (ATT) policy, and completely dodged the question. This does, to be fair, fit with Spiegel’s long-standing policy of being publicly pro-Apple, but it’s increasingly difficult to escape the assumption that Snap’s business is irreparably impaired.
This is a point that Eric Seufert has been making as well; he noted last month that Spotify’s ad results, which aren’t impacted by ATT, suggest that the ad market is much healthier than the Snap (and Meta) results suggest, and he made the same observation about Netflix last week. Seufert wrote in the context of Snap’s results:
As I wrote in Does Netflix’s Q3 earnings beat undermine tech’s macro narrative?, macroeconomic weakness has been used as a convenient explanation of the damage suffered by a very specific type of advertising platform and certain categories of digital advertisers as a result of ATT. But my contention — which I laid out in the above article and using Spotify’s Q2 2022 results — is that ATT’s role in the current period of turmoil for these companies is de-emphasized by them because ATT and other impending privacy restrictions are so systemic and permanent.
I get the argument; at this point, though, Snap might as well come clean — the market certainly has:
Snap’s stock is at its lowest point since February 2019 (ignoring stock-based compensation and buyback effects, but you get my point), when the company was first emerging from its post-IPO attempt to build a direct response business.
Snap’s Direct Sales Reset
The most interesting insight to glean from Snap’s call, though, was their strategy going forward; from Spiegel’s opening remarks:
As part of our reprioritization efforts, we have reorganized our team to better meet the challenges of the current environment and to make as much progress as possible as quickly as possible in the areas of our business that we are able to control. In particular, there is a significant opportunity to improve coordination and prioritization across our engineering, sales and product teams. In an effort to realize this opportunity, we promoted Jerry Hunter to Chief Operating Officer. Jerry leads our monetization efforts across our three operating regions, EMEA, APAC and Americas as well as our engineering, growth, partnerships and content, AR enterprise and SMB teams.
Hunter expounded on this integration point:
Improving our product and technical performance of our advertising platform requires tight collaboration and teamwork across sales, product and engineering. Our renewed focus will be on creating alignment across our teams to ensure that feedback from clients helps inform our product road map and that each of our teams is more directly accountable for advertiser success. After years of rapid growth in the size of our team, we’re focused on driving productivity in our sales organization and improving our go-to-market with more clarity about the role that Snapchat plays in the lives of our community and how we can help businesses grow. We will listen to our clients, clearly understand their challenges and opportunities and demonstrate how Snapchat can play a meaningful role in driving their success.
Hunter gave an example of this work later in the call:
I just want to give you a sense of how we’re refocusing and realigning sales engineering and product teams around the customer. So, let me give you an example of a program we started a couple of months back called the Reference Customer Program. The idea is to find customers that we want to ensure getting the most from our platform. We brought several SWAT teams together, a SWAT team that included folks from the account team, the engineering team and product teams to review every aspect of how the advertiser was using the platform. And we found that through this, we were able to help improve their implementation, better utilize features that are already in the platform, in a couple of cases, did a little bit of feature integration work.
In all those cases, the customers had higher ROI than expected and they were happy with their results. Now we’re in the process of rolling these successes out to other customers who might have similar opportunities. And I think that, that’s just a product of this — of bringing the teams together. So I think there’s a lot of opportunity for us to just bring things together and take advantage of what we’ve already got out there and have it implemented in a better way.
Forgive all of the excerpts in this Update, but the insight here is between the lines. I noted that Snap’s stock price is at its lowest point since the company first started to show fruit from its attempt to build a direct response business; at this point the most reasonable read on the situation is that that business is completely dead, and not only because Spiegel refuses to talk about it (the company did emphasize it continues to invest in direct response advertising, for the record). What is also striking is that what Hunter is talking about here is anything but direct response advertising.
The hallmarks of a direct response business are not simply buying ads in an auction, and not even the ability to measure conversions directly. It’s also having a platform that is self-serve: advertisers place ads without ever needing to deal with sales, or have any sort of handholding. Moreover, these are the only sort of digital advertising businesses — i.e. Meta and Google — that ever seem to have generated any sort of meaningful profit in the long run.
What Hunter is describing here with his talk of integrating engineering and sales and product is anything but: his go-to example of SWAT teams is by definition non-scalable. Now, to be fair to Snap, I presume the intended takeaway is that what is learned from these SWAT team interactions will be incorporated into the product and made into a scalable self-serve offering, but that is by definition well down the road. For now it sure seems like Snap is back to the basics — and that investors are right in judging the worth of the company.
One more takeaway: one of the longest-running critiques of Twitter is that the company never managed to move away from sales-driven brand advertising to a self-serve direct response business; given that Snap has far more Daily Active Users (DAUs) than Twitter, presumably with more engagement on more visual content, it seems reasonable to assume that Twitter’s real value is somewhere south of Snap’s $12.8 billion. That, needless to say, isn’t great news for Elon Musk’s prospects in realizing any sort of return for his $44 billion purchase price.
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