Since Snapchat’s IPO in early March, the company has been under pressure from investors. They want management to prove SNAP’s new advertising model will drive revenue growth. Now we are in September, and Snapchat stock is trading well below the IPO price. Currently, many investors and analysts do not believe Snapchat will ever be able to compete with Facebook. Contrary to that opinion, FB has been copying SNAP’s latest features and pushing them to their 2 billion user base. FB seems to see SNAP as a threat, even if the analysts do not.
We agree that it is appropriate to question SNAP’s ability to continue innovating at a pace that could keep them relevant. Competing with a behemoth like Facebook who can replicate your features almost instantly should not be taken lightly. But, personally, I love where the company is positioned and I think they should outperform FB as an investment going forward. Let me tell you why.
How exactly does Facebook make money?
When I hear someone say “Facebook,” the first thing that comes to mind is $500 billion (this is the approximate value of the FB company at the time of this writing). This company, that offers a free service to its users, is worth half a Trillion dollars. However, when I ask the average person if they know how Facebook makes their money,” the answer is almost always a curious “no.” But, I tend to wonder if it would change people’s behavior if they knew the facts.
Targeted Advertising and Facebook
To understand the Facebook revenue model, you only need two words, Targeted Advertising.
Here’s a quote from the Facebook Business page: “With 2 billion people on Facebook and more than 500 million accounts on Instagram, the customers you want to reach are here. Whether you want your ad to be shown to people based on age, location or hobby, we can help you connect to the ones who are likely to be interested in what your business offers. The audience you select when creating your ad can be as narrow or broad as you like.”
Facebook’s ability to place targeted ads has paid off handsomely. FB reported advertising revenue of $9.16 billion in the second quarter of 2017, a 47 percent increase over the same quarter last year.
What is so bad about Targeted Advertising?
While targeted advertising isn’t new, some of the lengths to which Facebook goes, and their lack of transparency, may give many a cause for concern.
As Express notes in a recent article, “FACEBOOK siphons an enormous amount of data from its users – whether it’s monitoring your mouse movements, tracking the amount of time you spend on any given post, or the subject of your photographs. The point is this, regardless of whether you’ve ever made a post or liked a brand on your social media feed, Facebook knows things about you from your browsing behavior.
Additionally, did you know that Facebook works with six data collection firms in the US – Acxiom, Epsilon, Experian, Oracle Data Cloud, TransUnion and WPP?
“They are not being honest,” said Jeffrey Chester, executive director of the Centre for Digital Democracy, told ProPublica. “Facebook is bundling a dozen different data companies to target an individual customer, and an individual should have access to that bundle as well.”
What information does Facebook collect?
Earlier this year, Facebook revealed the extensive list of information it holds on users and uses to target its advertisements. The criteria they monitor ranges from the obvious, age, hometown, school, friends, to the downright bizarre.
For example, Facebook keeps a record of when you’ve recently started a new relationship, calculates how much money you are likely to spend on your next car, tracks what operating system you are using to login to the social network, and more. It will even track the types of credit cards you have owned. “We want the ads people see on Facebook to be interesting, useful and relevant,” a Facebook spokesperson told The Washington Post.
How does Facebook get all this information?
In order to build a profile on you, Facebook will track your on-site activity – like the pages you have liked, the advertisements you click, the device you’re using to access the social network, and where you are when you use Facebook. Facebook also measures how long you spend reading posts, statuses, comments or browsing a friends’ photos. If you linger on a certain person’s status, or read through the comments under a certain kind of video, Facebook will take this as an indication you’d like to see similar content.
But, it’s not simply your activity on Facebook that Mark Zuckerberg’s hugely successful service tracks. If you remain logged into Facebook, the social network can see almost every other website you visit. And even if you log-out of your Facebook account before you start surfing the world wide web, it continually keeps a close eye on you. Facebook is alerted every time you load a webpage with one of its “Like” or “Share” buttons embedded. Additionally, any websites that use advertisements sourced from Atlas network will also track your movements.
Facebook also provides online publishers with a small piece of code – dubbed Facebook Pixel – that allows them (and of course, Facebook) to log any Facebook-using visitors.
The Electronic Frontier Foundation, which blasted Microsoft over its “unprecedented” data collection in Windows 10, called Facebook’s targeting methods “the most invasive in the world.”
What does all this information mean to my privacy?
While Facebook says this is all in the name of advertising, one has to wonder about the risks of a single entity having so much info on you.
Former Facebook Executive, Chamath Palihapitiya, says “Facebook and Google effectively are surveillance states. And they have so much personal and private information about so many citizens of so many countries.”
Even if you aren’t worried about those threats, do you know how much your information is worth? I remember learning in marketing classes at Auburn how much an honest customer survey was worth. That’s why I don’t fill out customer surveys if you don’t compensate adequately, unless the experience was amazing or horrible. Now, think about Facebook as an ongoing survey where they can closely spy on your page and sell access to you to anybody willing to pay. Did you know you were being this generous with your personal information?
Is this data collection legal?
Senior policy director for the Center of Democracy and Technology, Chris Calabrese, discusses the legality of Facebooks extensive data collection:
“When users sign onto Facebook, they choose to give up their personal information in order to get valuable services from the companies, which sets up a dynamic fundamentally different from government surveillance. More often than not, user consent is not enough to justify data collection, because of the lack of transparency in the process. People aren’t always aware of the amount of information being collected about them when they surf online.”
Gabe Rottman, legislative counsel at the ACLU elaborated about the transparency in Facebook’s data collection process: “People should be voting with their feet when companies aren’t supporting the most aggressive privacy policies, but users are often not informed voters. You can’t vote with your feet unless you know you need to vote with your feet.”
This brings me to why I like Snap
To get started, I’d like to talk about some of the functionality from a user perspective. These are the first things I noticed about the Snapchat app. First, you get to choose who sees each post. This doesn’t require management of elaborate privacy settings. It’s simple.
Secondly, even if you are “friends” with someone on Snapchat, they don’t see your every move unless you really want to see it. Each time you send a snap, you choose whether to send it to specific friends, or share to your “story”, more on those later.
Next, you can have a discussion with someone regarding one of your snaps without the rest of your friends seeing it. This goes a long way to root out the endless political debate that you see on Facebook. When someone replies to you, you are the only person who sees it.
Further, if I decide that I do want all of my friends to see my snaps, I can temporarily share the video to my story. This allows me to show a post to everyone in my friends list and they can watch it as many times as they like for 24 hours. This allows me to post to or communicate with my friends without permanently storing these posts for family, friends or future employers to see for eternity. These stories are also a really fun way to curate a video to capture an event, party, promotion, or just a night on the town. Once you have curated your story, you can save it to the camera roll on your mobile device. I have hundreds of these curated stories saved on my mobile device like a scrapbook. The best part is this: unless the story is saved within the 24 hours, it will be gone forever.
Finally, the Snapchat app doesn’t constantly badger you about what you did on this day last year, or how long you’ve been friends with someone. It also doesn’t “remind” you when your friends haven’t heard from you in a while. It’s there if you need it. Otherwise, it isn’t a constant infringement into your daily life. If you’ve ever installed the Facebook app on your phone, you know this to be a constant annoyance. I’m not saying I saved the best for last, but for someone who is very busy, the Facebook reminders can be a major distraction. I prefer the less intrusive methods of Snapchat.
Why isn’t all of this common knowledge?
The short answer: because most people do not look.
Snap CEO says Snapchat doesn’t need to be as big as Facebook to compete
Snap CEO Evan Spiegel is preaching a story of quality over quantity. During an interview with Recode, Spiegel had lots to say: “Throughout the hour-long call, Spiegel spoke confidently — very confidently in some instances — about a recurring theme: Snapchat won’t succeed because of massive growth numbers, like Facebook. It will succeed because it offers more quality than others, like Facebook.”
That’s why Spiegel got philosophical about how Snapchat planned to grow its user base. He dismissed typical consumer app practices, which he called “growth hacks,” like excessive push notifications or prompts for users to connect with everyone in their address book.
Spiegel elaborated more further in the Recode interview: “We don’t think that those sorts of techniques are very sustainable over the long term,” he said. Instead, Spiegel talked about adding users through product improvements — and making it more fun to share.
The quality argument was made yet again when Spiegel talked about Snapchat “Shows,” the made-for-Snapchat video series publishers are creating for the app’s users. Those videos aren’t “repurposed from TV or repurposed from the internet,” Spiegel explained.
Translation: They’re better quality, at least for Snapchat.
All of this is to say that Snap thinks it can differentiate itself in a way that isn’t reliant on big user numbers, a strategy that Facebook values highly. Quality is also a focus for big brand advertisers. Facebook and Google still haven’t fully solved the “quality” equation in my opinion. Direct response ads — or download-this-app or sign-up-for-this-service ads — still make up the bulk of their ad businesses. Snapchat, however, could become a big draw for brand ads if they buy into Spiegel’s quality argument.”
Curated News and Human Curation
Facebook disclosed last Wednesday that it had identified more than $100,000 worth of divisive ads on hot-button issues purchased by a shadowy Russian company, some posted by “bots”, linked to the Kremlin. On the other hand, SNAP is committed to human curation to position its content as high quality. “There is a degree of safety for brands with Snap’s human curation,” said Chris Paradysz, co-chief executive of the digital-marketing firm PMX Agency, which has purchased ads on Snapchat for its clients. “How that scales is everybody’s head-scratcher.”
Snap says it is committed to human curation, and the company is testing new software to help editors more quickly and efficiently craft “Stories”, former employees say. Editors will remain critical to how Snap presents stories in the more prominent “Discover” section of the app, a spokeswoman said.
CNN is launching its own daily news program on Snapchat, starting nightly at 6 PM ET. This is the second news show to arrive on the social platform, following NBC News’ early success with its twice-daily show “Stay Tuned.” A show which saw more than 29 million unique viewers in its first month.
Will this model succeed?
Snap has already started to draw comparisons to Twitter, another consumer product that ran into user growth issues while living in Facebook’s shadow. There are other similarities, too. One can’t ignore the facts that both products can be hard for people to use, that both businesses are unprofitable, and both companies spend a lot of money on stock awards granted to employees.
Kurt Wagner of Recode hits the nail on the head with this comment “Snap offers a vastly different product. It’s more intimate and personal. And, as a result, is less likely to suffer from the kind of abuse that Twitter deals with. While Twitter is trying to claw its way into the video space, Snap has been there from the beginning.”
And to me, there lies the essence of Snap. This is an intimate “club-like” feel where they aren’t spying on your every move or trying to get you to reach out to connect / post / like, etc with all of your “friends”. We are only one major hack or political regulation away from the main profit driver of Facebook going away. Snap appears to be focused on promoting a cool product that people trust and want to spend time on. We believe this is the model of the future for social media.
At DreamWork Financial Group, we believe that trust will ultimately define success in this space and lead to permanent future growth. I agree with Spiegel that many of the methods Facebook is employing will not hold up for the long term. Snap bill themselves as a camera company, but is not only a camera. Snapchat has positioned itself as the trusted method of communication, not only among friends and family, but also from the outside media. Look for daily users to continue to grow organically and time spent on the platform to grow as well. As long as they remain focused on building a cool, trusted communication platform, it seems as it won’t be long before they will be distinguished as the highest quality advertising medium.
To learn more about DreamWork Financial Group and our Fee-Only Wealth Management model, visit our website and schedule a meeting with our Chief Financial Strategist, Clint Kirby and be sure to sign up for our free monthly newsletter. Also, be sure to check out our archived newsletters, bold predictions and other articles in our knowledge base.
Clint Kirby – Chief Financial Strategist
DreamWork Financial Group
Clint Kirby, DreamWork Financial Group, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.