Background

Snap was established in 2010, and the company released Snapchat in 2011. The application allowed users to share "snaps" or photographs and videos, similar to social media platforms such as Facebook and Twitter. Snapchat also offered a few differences. Users could choose functionality that caused snaps to disappear a short time after they were sent. Snaps could be directed to one person or to a limited number of users, rather than having them post to everyone with access to the person's social media page. Users could also create and share content primarily through their smartphones, rather than computers and tablets. These features proved appealing to individuals ages 18-34, who represented the largest Snap demographic group. As a result, Snap leaders watched the number of daily average users grow exponentially, from approximately 1,000 in 2011 to 150 million by 2016 (Snap, 2017).

Snapchat developers continued to add new features to the application over time. These included Stories, Geofilters, Lenses, Bitmoji, Memories, and Discover. The Stories functionality was added in 2013. Users could combine snaps into longer messages and post them for others to view. Geofilters appeared in 2014 and let users customize their snaps with graphics based on their current locations. Users could also access Geofilters created by organizations seeking to promote products or events through Snapchat. Lenses emerged in 2015 and represented another content customization tool. Users of Lenses could select from a variety of options allowing them to add animal ears and noses, glasses, and other facial configurations to their snaps. Discover also appeared in 2015 and displayed the stories posted by users to their friends. This section also provided content posted by media outlets such as GQ and NBC, other organizations such as Amazon and Tough Mudder, and celebrity users, including Diplo and Simone Biles. Snapchat added Bitmoji in 2016. This allowed users to develop cartoon avatars, which they could customize, selecting physical features and clothing, and share with friends via Snapchat or text messages. With Memories, also added in 2016, users could store snaps and stories for later use (Snap, 2017).

Company leaders incorporated the organization as Snapchat, Inc. in 2012, and later shortened the name to Snap Inc. in 2016 (Snap, 2017). CEO Evan Spiegel and his leadership team placed particular emphasis on providing different opportunities for users to engage with their products (Snap, 2018a). New product innovation represented a key area for the organization. To facilitate these efforts, the company spent increasingly more on research and development activities. These expenditures grew from USD 82.2 million in 2015 to USD 1.5 billion in 2017 (Table 1). To service its customers and spur growth, the company expanded from 600 employees in 2015 to more than 3,000 by 2017 (Snap, 2018a). The increase in company spending corresponded with growing usage among Snapchat consumers. This user base expanded from 158 million daily users in 2016 to 191 million in 2018. Users posted more than 3.5 times per day, surpassing the daily number of other photographs consumers take on smartphones and digital cameras (Snap, 2018a).

Table 1. Snap Income Statement (USD Thousands)

2Q 2018

1Q 2018

2017

2016

2015

Revenue

262,263

230,666

824,949

404,482

58,663

Cost of revenue

191,565

196,798

717,462

451,660

182,341

Gross profit

70,698

33,868

107,487

47,178

123,678

Operating expenses

Research and development

203,246

200,986

1,534,863

183,676

82,235

Selling, general, and administrative

225,294

225,412

2,058,200

289,531

175,816

Total operating expenses

428,540

426,398

3,593,063

473,207

258,051

Operating income or loss

357,842

392,530

3,485,576

520,385

381,729

Total other income/expenses, net

6,539

9,257

25,624

86

1,247

Earnings before interest and taxes

351,303

383,273

3,459,952

520,299

380,482

Interest expense

930

934

3,456

1,424

0

Income before tax

352,233

384,207

3,463,408

521,723

380,482

Income tax expense

1,077

1,578

18,342

7,080

7,589

Net income

353,310

385,785

3,445,066

514,643

372,893

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 organization's 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 aclesacles 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 inventory"hundreds of thousands of pairs"and 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 Spiegel's 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).

Expansion

Snap leaders knew they needed to generate more revenue to offset increasing expenses. The majority of the advertising revenues were derived primarily from a limited number of locations and countries. More than 70% was earned in these markets, and 60% of daily active users resided primarily in North America and Europe (Snap, 2017). Part of this focused approach on a smaller number of markets reflected the need by Snap for places with the capability to offer high levels of bandwidth, comprehensive cellular networks, and heavy smartphone usage. As a result, the company faced limitations in terms of where it could expand, seeking to grow primarily in countries meeting these basic requirements (Snap, 2017).

Most Snapchat users also hailed from a limited number of countries. Snap leaders expected the number of users to eventually plateau, which contrasts with its exponential growth from 2011 to 2017. Signs of this slowdown appeared in 2018. The company reported that the number of average daily active users dropped from 191 million in the first quarter of 2018 to 188 million in the second quarter. To attract new advertisers and retain current ones (which represent the largest source of revenue), Snap leaders needed to identify ways to grow its business (Snap, 2017). Despite its best efforts, the company acknowledged the potential for generating losses with no possibility of ever producing profits (Snap, 2017). In conjunction with this admission, the company noted the potential challenges with its innovations going forwardwhere customers could reject new products, resulting in the organization making sizable investments in research and development and related expenses, with little to show in return (Snap, 2017). Instead of viewing these product introductions as instant revenue generators, Snap leaders took a more long-term view and hoped the innovations would at a minimum attract and engage customers and advertisers. The company could then build additional value and revenues through increased customer engagement.

Product Life Cycle

The company leaders described their primary product, the Snapchat application, as relatively easy to use. They also noted that Snapchat presented few barriers to entry to current and potential competitors (Snap, 2017). The company, therefore, faced significant competition from both mature organizations and upstart challengers. The former group included behemoths such as Apple, Facebook, Google, and Twitter (Snap, 2017). Many of these companies dwarfed Snap in size and resources. Snap leaders also recognized the potential for new companies to develop similar applications and attract users away from Snapchat. Furthermore, they viewed camera hardware companies as additional competition. Companies such as GoPro offered products that would go head-to-head with Spectacles, a product line already facing serious hurdles with limited consumer demand and growth (Snap, 2017).

Snap leaders knew they needed to address their product life cycle challenges. Levitt (1965) outlined the product life cycle and its four stages in greater detail: (1) market development, (2) market growth, (3) market maturity, and (4) market decline.

Stage 1: market development. The first stage in the product life cycle, market development, occurs when new products enter the market. No clear demand exists for the product, which may generate little attention and few sales. Products that present new concepts, options, and/or functionality face greater barriers in terms of generating consumer demand (Levitt, 1965).

Stage 2: market growth. The second stage, market growth, reflects a progressive increase in the demand and sales of the new product. Growth first increases at a relatively slow rate and then becomes exponentially faster. As sales grow, competitors enter the market, as they perceive higher sales can or do translate into profits. Some companies will gain more market share, while the market share of others will decline with these new entrants (Levitt, 1965).

Stage 3: market maturity. In the third stage, market maturity, demand plateaus as consumers receive the product. As multiple firms produce versions of the product, the market becomes saturated. Additional sales originate from the small percentage of consumers who do not have the product or those replacing their original purchases. Shifts in market factors occur, including the introduction of product substitutes or changes in consumer values, fashion, and demand, as well as product obsolescence (Levitt, 1965).

Stage 4: market decline. The fourth and final stage, market decline, occurs when sales decline as consumers ultimately lose interest in the product. Companies try to remain viable for as long as possible, seeking to retain their customers while trying to push other organizations to leave the industry. Activities include engaging in continued price competition, which lowers profit margins for all companies, and offering to merge with or buy out competitors (Levitt, 1965).

Companies can gain if they properly understand and predict product life cycles, develop strategic approaches to entering the market, and extend their stay there (Levitt, 1965). These activities may prove especially consequential for companies, such as Snap, with heavy emphases on research and development and new product development.

Snapchat and Sports

One potential opportunity for Snap existed with the sports industry. In December 2017, Snap published a report about Snapchat users as avid sports fans. The study compared Snapchat users to non-users, and found the former group rated sports as important to them. This finding held true for a variety of sports and properties, including the National Basketball Association (NBA), professional soccer, college basketball and football, boxing, the National Hockey League (NHL), and the National Association for Stock Car Auto Racing (NASCAR) (Hutchinson, 2017).

The Snapchat application attracted a younger demographic, which partially explained the connection between Snapchat users and sports. Industry analysts also attributed this popularity to Lenses and social media influencers who highlighted various sports. These promotions were reflected in Snapchat consumption, as users frequently interacted with the application during sporting events. In addition to their Snapchat usage, these consumers more often used social media in general, shared photos and videos, provided game updates, and took part in contests relative to those who do not use Snapchat. Surveyed users indicated they bought team merchandise more often than non-users. These individuals felt social media platforms and other technologies allowed them to track their preferred sports and teams and gather more information about their favorite players. They also indicated that they enjoyed watching game highlights as opposed to an entire sporting event (Hutchinson, 2017).

To leverage this sports interest, Snap leaders sought to develop more engagement with users in three areas: (a) Snapchat functionality, (b) media companies, and (c) sport properties.

Snap made changes to its functionality to allow more user interactions when attending sporting events and watching games at home. Relationships with two companies in particularStats and Tagboardallowed Snap to capitalize on this interest in sports exhibited by its users.

Stats. Snap signed a partnership with Stats, which gave users access to game scores, first from the NBA and Major League Baseball (MLB), followed by college and high-school games. Stats planned to expand its offering to include cricket, lacrosse, and rugby, as well as to provide more expansive details from other professional sports such as the National Football League (NFL). In conjunction with scores, users would have access to Geofilters and other features to make Snapchat more integrated into sporting events (Dave, 2017).

Tagboard. Snap also partnered with Tagboard to increase in-game engagement at live sporting events and on television. Tagboard, a software company, worked with social media outlets such as Facebook, Instagram, and Twitter. Their software allowed users to post pictures, tweets, and other social media content on Jumbotrons at live sporting events. Teams such as the Seattle Mariners, Minnesota Vikings, and New Orleans Pelicans, as well as the Golf Channel, used Tagboard at their events. Tagboard executives felt these social media activities created an environment that encouraged fans to share their experiences and interact with other fans. They believed teams could also use this attention to encourage fans to follow their Snapchat accounts and increase engagement at their events and beyond (Flynn, 2017).

Media outlets also wanted to explore potential opportunities with Snap. These included ESPN, Fox Sports, and the Olympic Channel.

ESPN. Snap worked with ESPN to create sports programming for the application. This followed the steps taken by NBC News and CNN to offer specific content for Snapchat users. ESPN opted to provide a condensed version of its sports news program, SportsCenter. Episodes would appear on the application twice per day during the week and once per day on Saturdays and Sundays. The episodes would last from three to five minutes and feature Katie Nolan and other ESPN hosts. This decision marked a transition for ESPN from creating stories for the Discover area of Snapchat to offering its own show. Executives from ESPN and Snap hoped the daily shows would attract more users to the application and encourage them to use it with greater regularity (Lynch, 2017).

Fox Sports. Snap partnered with Fox Sports to provide specialized content during the 2018 FIFA World Cup. This included a Publisher Story for the duration of the tournament. Snapchat users could keep up to date with the daily action through match previews and highlights. The application feature Our Stories would give users an opportunity to see archival content from the World Cup and perspectives from World Cup viewers around the globe (Cohen, 2018).

The Olympic Channel. Similarly, Snap signed a multi-year arrangement with the Olympic Channel to provide more content from the Olympic Games on its application. This would include Our Stories, which like the FIFA World Cup contract would access archives. The application would offer a show, Far From Home, and feature athletes striving to qualify for the Olympics. Beginning with the 2018 Winter Olympic Games, Snapchat offered Lenses and Geofilters featuring the Olympic Games and its mascot. The International Olympic Committee (IOC) leadership viewed this as a way to connect with a younger demographic in unique ways, beyond their television broadcasts (IOC, 2018).

Finally, Snap developed relationships with several specific professional sports leagues, including the National Football League, Indian Premier League, and Union of European Football Associations Champions League.

National Football League (NFL). Snapchat signed a multi-year contract with the NFL to provide professional football content to its users. An estimated 42 million users viewed this content during the football season. NFL executives saw this as an opportunity to reach a younger demographic and provide footage in a different way than their more traditional delivery methods. This media included a daily channel with articles, videos, and live stories, as well as views from different parts of stadiums. The league also created Snap Lenses for the playoffs to increase engagement. In turn, Snap benefited from advertising revenues from related NFL sponsors such as Gatorade and Pepsi, several of whom created special Snapchat Lenses for the Super Bowl.

Indian Premier League (IPL). Snap agreed to a partnership with four IPL teams: Delhi Daredevils, Mumbai Indians, Rajasthan Royals, and Royal Challengers Bangalore. The teams would appear within the Stories part of the app, and additional options could include Lenses and Geofilters. This deal represented one of the first forays by Snap into India, a country Spiegel avoided in the past. A former Snap employee alleged that Spiegel characterized India as poverty-stricken and believed the company should avoid it and focus on wealthier countries. The IPL relationship reflected a shift in sentiment and a potential path to further expansion outside of its previously limited markets (Banerjee, 2018).

Union of European Football Associations (UEFA) Champions League. Snap also joined forces with UEFA. This relationship would allow another professional sports league to provide customized content for Snap users. The content would include Our Stories with in-match and other perspectives from athletes, teams, and fans. Adidas, as a UEFA Champions League sponsor, would present related advertisements around the Our Stories content (Connelly & Stewart, 2017). As with the NFL partnership, this arrangement would give Snap access to a major sports property and its corporate sponsors.

Next Steps

Industry analysts argued these partnerships allowed Snap to distinguish itself from competitors such as Twitter and Facebook. Recognizing its primary demographic preferred to consume sports in highlights rather than full broadcasts, the company focused on shorter segments, Our Stories, and other content in briefer and more condensed formats. Additional features, such as Lenses and Geofilters, allow users to interact with sport media properties in different ways, beyond simply watching or attending games (Connelly & Stewart, 2017).

The question for Snap was whether these initiatives would help the company address some of its strategic challenges and ultimately generate a profit. Snap offered multiple products with varying levels of success. Expanding into the sports market represented a potentially viable opportunity for the company. Spiegel and his leadership team needed to identify in what product life cycle stages their current products existed and what next steps they should take, including whether to stay in the market and how to expand the market and extend product life stages where needed.

Describe Snap Inc. competitors and explain how it can increase its market share among the competitors it faces.

(Note: You can use above Case for reference)