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February 22, 2017

Instagram Steals Thunder from Snapchat Ahead of IPO

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Six months ago, Snapchat was the undisputed social media king. But as Snap Inc. — the photo-messaging app’s parent company — gears up for its highly-anticipated IPO, a storied rival has become a thorn in its side.

In August 2016, Facebook announced the launch of Instagram Stories, a clone of Snapchat’s main stories feature even down to the name. The borrowed idea was no secret, as Instagram’s head of Product Kevin Weil recently explained: “[We] built on a format that Snapchat invented…It’s a format, [and] we believe that format will be universal.”

Snapchat began 2016 with consecutive quarters of monstrous growth. In Q1 2016, Snapchat averaged 122 million daily active users, growing 14 percent from the previous quarter. In Q2 2016, Snapchat had its best quarter ever, hitting 143 million users at a growth rate of 17.2 percent.

Then, Instagram Stories happened.

With a new competitor on the block, Snapchat’s growth slowed to 7 percent in Q3 2016, then even more drastically to 3.2 percent in Q4 2016.

Prominent Snapchat users noticed a difference in viewership too. Social media stars reported declines in Snapchat Story view counts ranging from 15 to 40 percent.

In the six months since its launch, Instagram Stories has attracted 150 million users – the same number of users that Snapchat reported in June 2016 after five years on the app store.

Facebook isn’t slowing down with its expansion of the stories “format” either. WhatsApp, a popular messaging app owned by Facebook, announced on Monday it’s rolling out its own version of Stories.

The stories expansion adds an interesting chapter to a rivalry between social media giants. In 2013, Snapchat turned down a $3 billion offer from Facebook to purchase the company. In the years following, Facebook launched several apps to compete with the startup, but found little success in stalling Snapchat’s growth (remember Slingshot? Neither do I).

But by mimicking Snapchat Stories, Facebook found a way to steal its rivals lunch at an incredibly vulnerable time. Snapchat’s parent company — Snap — is preparing for its landmark initial public offering as soon as March, and last week the company’s founder slashed its valuation from $25 billion to $18.5 billion, a sign that it could be feeling the heat from competitors.

And Facebook isn’t the only one breathing down Snapchat’s neck. A new wave of live stream apps — led by the rapidly growing Houseparty — is testing the loyalty of Snapchat’s critically important 18-to-24-year-old demographic.

Snap acknowledged the increased competition in its recent IPO filing:

“We face significant competition in almost every aspect of our business both domestically and internationally. This includes larger, more established companies such as Apple, Facebook (including Instagram and WhatsApp), Google (including YouTube), Twitter, Kakao, LINE, Naver (including Snow), and Tencent, which provide their users with a variety of products, services, content, and online advertising offerings, and smaller companies that offer products and services that may compete with specific Snapchat features. For example, Instagram, a subsidiary of Facebook, recently introduced a “stories” feature that largely mimics our Stories feature and may be directly competitive.”

Now that the cat’s out of the bag, Snap will have to re-gain trust from investors that are questioning whether it’s worth the valuation it’s seeking. This is no easy task considering that 2016 was the slowest year for U.S.-listed tech IPOs since 2009.

The process begins this week, as Snap kicks off a multi-week “road show” in which it will present to investors in London, New York, Boston and San Francisco. If Snap wants to convince investors it will pop, it needs to show why it belongs in the same class as Facebook and Apple rather than Twitter.

Snap must demonstrate that it’s transforming into a content and media company, and that its very large and very young user base — 45 percent of snapchat users are between 18-24 — will translate into a massive advertising business.

It also needs to show that its foray into hardware — Snap recently launched a pair of camera equipped glasses — is a strategic investment into product innovation and not a goofy spin-off.

Additionally, it needs to position its founder, Evan Spiegel, as an innovator that will one day be seen in the same light as Mark Zuckerburg or Steve Jobs.

If Snap can weather the storm of recent competition and convince investors that its app is just the tip of an iceberg, it can turn its fate around, and possibly that of the technology industry too.

This will be the largest U.S.-listed tech offering in three years, and you can bet that investors in companies such as Uber and Airbnb will be watching closely for signs of revival in the tech IPO marketplace.

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