CASE

In 2018, Snap leaders faced challenges such as negative public responses to the redesign of the Snapchat smartphone application, lackluster demand for Spectacles, revenue streams limited primarily to advertising, and no expectation of profits in the immediate future. These issues, associated with a saturated market and slowing growth, were reflected in the company stock price, which fell from a high of USD 29.44 in February 2017 to a record low of USD 10.50 in May 2018. Company leaders needed ways to manage these issues and ultimately generate a profit. Partnerships within the sports industry, including with media providers and sports leagues, represented one potential opportunity. Using the product life cycle framework, students are asked to evaluate the current and future potential of Snap for success with its various product lines, including its foray into sports.

Snapchat Application Challenges

Despite this activity, Spiegel and Snap leaders faced a series of challenges. One of the biggest occurred when the company introduced changes to the Snapchat application in December 2017, followed by more modifications and an expansive rollout in February 2018. These changes were met with negative reactions from users, who believed the company made Snapchat more cumbersome to use (Snap, 2018b). Advertisers also questioned this decision to redesign the application. Updates included separating the content users saw, splitting personal connections (e.g., friends, family members) from celebrities and corporations. The latter groups pushed back against this development, asserting that they would lose important connections to everyday users and the opportunity to readily disseminate their messages to them (Kosoff, 2018b). Some companies also expressed their concerns regarding the Discover section, which allowed media outlets such as CNN and the Daily Mail to provide news content and advertising. The redesign had notable and negative effects on this part of the application. Media companies saw their numbers for unique views, news subscribers, and consumer usage plummet, in some cases by as much as 50%. The potential instability of Snapchat increased concern among media companies about whether this application had lasting power (Kosoff, 2018b).

Spiegel conceded the changes did not receive the positive feedback he and others expected, and the company struggled with addressing customer criticisms. Spiegel wanted to balance providing an application that met consumer needs with also adhering to the vision of the company to innovate. Company leaders recognized that their key demographic group exhibited less brand loyalty toward products and could quickly transition to the next trend, leaving Snapchat behind (Snap, 2017). Snapchat executives needed to ensure they offered products meeting the capricious demands of their young customer base. Otherwise, the company would experience negative consequences such as declining user numbers and advertising revenues (Snap, 2017).

Financial Performance

In addition to the redesign challenge, the company struggled to generate a profit. The company reported a loss of USD 373 million in 2015, and these losses grew to USD 3.5 billion in 2017. The first half of 2018 suggested this losing trend would continue, as the company reported a USD 739 million loss for the first six months. On a positive note, this first-half number did reflect a slowdown compared to the USD 2.7 billion lost over the same period in 2017 (Snap, 2018c). Expenses contributing to the losses included sizable research and development expenditures. The company continued to expand its headcount, and expenses related to salaries, benefits, and other headcount expenses created additional financial pressures. Company leaders viewed these expenses as necessary to provide the products its consumers demanded and to continue growing the company and its user numbers. They expected revenue growth to offset these expenses and assumed this would be realized primarily through the sale of advertising (Snap, 2018a).

Most of the organizations revenues were derived from advertising, with revenue streams related to Snapchat advertisements and application features such as sponsored Lenses and Geofilters. These equated to 98% of organizational revenues in 2015 and 96% in 2016, as the number of advertisements featured on the application grew during this time period (Snap, 2017). The advertising contracts were frequently shorter term, and the company outlined the risk of having few long-term advertising contracts, including revenue instability. They noted, however, the challenges in convincing advertisers to make commitments of longer durations, given the relatively unproven nature of their products and users (Snap, 2017).

In addition to growth in revenues, cost of revenue increased with time. These costs included technology expenses such as bandwidth and storage. Expenses associated with the Spectacles product line also fell into this category (Snap, 2017). The company introduced Spectacles in 2016. The glasses allowed users to make snaps while wearing them. A seemingly novel idea, the product generated notable expenses without offsetting revenues. This included a USD 40 million write-off for excess inventory reserves, inventory purchase commitment cancellation charges, and asset impairments in 2017 (Snap, 2018a). Spiegel reported that sales for Spectacles reached 150,000 units in 2017, but consumer demand never hit the levels anticipated. In fact, more than half of those who purchased the product did not use them after the first 30 days. This resulted in excess inventoryhundreds of thousands of pairsand eventually the write-off (Kosoff, 2018a).

Despite this unfavorable development, Snap leaders planned to introduce new versions of the Spectacles in fall 2018. Changes to the original product included different frame colors, improved resistance to water, and better performance. An aluminum version would include two cameras. This move reflected Spiegels decision to embrace the notion of Snap as a camera company rather than simply a smartphone application. Offering more camera hardware could help the company distinguish itself from Facebook, Instagram, and other competitors. Industry analysts, however, noted the challenges other camera companies such as GoPro faced in creating sustained demand and questioned whether Snap could succeed where others had failed (Kosoff, 2018a).

Beyond the cost of revenue, Snap incurred expenses related to advertising costs, which grew from USD 2.7 million in 2015 to USD 10.9 million in 2016 (Snap, 2017). Research and development expenses increased, as mentioned above, and included related personnel costs such as salaries and benefits. These expenses grew from USD 82.2 million in 2015 to USD 1.5 billion in 2017. Sales and marketing expenses likewise increased, and these included personnel costs, market research, promotional expenses, and public relations. General and administrative costs consisting primarily of personnel costs, including stock-based compensation, also grew. Total selling, general, and administrative expenses expanded from USD 175.8 million in 2015 to USD 2.1 billion in 2017. Company leaders projected expenses would continue to grow in the immediate future to help fund the growth of the organization, develop innovative products, meet shifting consumer demands, and produce new revenue (Snap, 2018a).

Develop a SWOT analysis of Snap, outlining company strengths, weaknesses, opportunities, and threats.

Identify the concerns raised by users, advertisers, and media outlets about changes made to the Snapchat application. Were these valid concerns? Why or why not?