Social networks may be the most valuable and durable types of businesses powered by “network effects,” the phenomenon of products or services becoming more powerful the more people use them. The social-networking companies in our recently launched Network Effect Index— a group of current and formerly public consumer-Web companies valued at $1 billion or more — outperformed the S&P by over 170 percent in the last five years, the most of any business category in the index.
This is one reason the imminent IPO of social/mobile app Snap, which thrives on network effects, is being so closely watched. Another is that Snap — the parent of the ragingly popular Snapchat service, and a company expected to be valued at roughly $20 billion at its offering — represents the first credible threat to the Facebook social-networking colossus. Interestingly, Snap has grown by following a path very different than Facebook’s — so much so that we believe Snap ultimately could be valued less like a traditional social network and more like a hardware-software company, like Apple, or a media business, like Comcast.
Still, whether Snap can continue to draw users away from Facebook and also compete with Facebook-owned Instagram, which just launched a photo and video “story” feature similar to Snap’s, will be a key story line to watch.
Snap has seen blistering growth since its launch in 2011, racking up more than 160 million users. The chart on the left, below, shows quarterly growth in Snapchat’s daily active users (DAUs) over the last two-and-a-half years. Next to it, however, is another graphic showing how the launch of Instagram’s “Stories” feature in the summer of 2016 appeared to slow down the number of Snapchat’s net, new daily active users.
So how did Snapchat take off so quickly, and chart such a different course than Facebook? Three main ways…
Not documenting anything
Facebook (along with its Instagram, WhatsApp and Messenger businesses) acts as the social system of record for your life. It stores your photos, keeps track of your relationships and the places you visit, monitors which products you like and your views on the latest news and so on. While this has created some value for consumers (and advertisers), there’s also been an unintended consequence: If you’re on Facebook, your life is now permanent for the world to search. Just ask recent college graduates looking for a job, or criminal suspects whose Facebook profiles are quickly ransacked by journalists.
This focus on permanence opened up an opportunity for a more whimsical, fun service (Snap) to promise not to document anything about you online. Through Snap, users take photos or videos with their phones and then send the “Snaps” to another user — and the Snaps disappear in one to 10 seconds. Not surprisingly, 60 percent of Snap’s users are 13-24 years old.
Having content disappear lowered the barriers to create content, which increased the amount of content for users to view on Snap. This drove engagement, and further accelerated the content-creation flywheel. What’s more, the fleeting nature of the service appealed to one of our basic emotions: the “fear of missing out.” FOMO drove people to check their Snaps at incredibly high rates, as nobody wanted to be the one to miss out on something cool.
It is interesting to note that while the ephemeral nature of Snap’s service drove it early on, the company found that disappearing photos and videos had their limits. The company last year launched Memories, a personalized — and permanent — album of favorite Snaps and Stories to bridge this gap and create stronger network effects and stickiness among its users. It will be up to Snap to navigate this ephemeral/permanent balance.
Keeping it real
Snap, by its nature, is extremely authentic. It encourages users to take photos and videos in-the-moment and post them without filters. The camera is the app, and capturing moments and sharing them quickly — not taking 10 different shots to find the most flattering pose — is the core action. Friends and family can see the “real” you without worry about judgement or consequence.
Will Kim Kardashian and DJ Khaled be the stars of tomorrow? They seem to have discovered the major key to success on Snap.
Facebook and Instagram, by contrast, sometimes lack authenticity. The perfectly posed photos and airbrushed visages of celebrities can look contrived and fake. Even Instagram, which is very popular among millennials, acts more as a “biography” of your life, a permanent public record with decreasing authenticity.
On Snap, meanwhile — especially after the launch of Stories — new celebrities such as reality-TV star Kim Kardashian and DJ Khaled, a rapper and record producer, have recently gained mass followings. DJ Khaled uses Snap to communicate with his more than six million followers on topics ranging from leadership to oral hygiene to party planning — all with no production costs. Fans love being able to peer into the real, unfiltered lives of these celebrities, and stars build stronger relationships with their fans.
Focusing on mobile video from day one
The other reason for Snap’s success is its singular focus on mobile video, an emerging content category that is drawing more and more viewers. Mobile video represented close to 50 percent of all online video views in 2015, up from less than 5 percent in 2011, according to the Ooyala Global Video Index. More users watched college football and the MTV VMAs on Snap than watched those events on TV.
Snap needs to out-innovate its competitors to stay cool and relevant after its offering. In keeping with its Los Angeles roots, Snap is currently the sizzling nightclub on the social-media circuit. The problem with hot nightclubs, though, is that they eventually fade in popularity.
Put another way, Snap needs to make sure its users’ parents don’t get on the app — which is what happened as Facebook matured and younger users shifted to services like Instagram. A full 30 percent of Snap users specifically cited their parents not being on the service as a reason to use the app over others.
Snap’s Spectacles rival the fashion houses of Prada and Gucci in design and fashion. Famous designer Karl Lagerfeld of Chanel and Fendi shot this picture.
One answer might be Spectacles, Snap’s answer to the geeky Google Glass. Actually taking out your phone is one of the last barriers to creating videos, and Spectacles — glasses with an attached video camera to stream content straight to Snap — anchor the user around creating reams of short videos to broadcast his or her life. As Spectacles continue to grow, Snap might have the opportunity to introduce other hardware products such as speakers or wearables. The company’s attention to design, brand and culture with these products draws comparisons to Apple.
The other major innovation lever Snap could pull involves interaction with the real world and artificial reality. As users continue to pull out their phones, Snap can create experiences to interact with physical and virtual places and items. The trendy Pokémon GO game proved there is excitement around bridging the digital and physical worlds through mobile phones, the key medium for Snap users. Snap has already begun this work with its augmented reality Lenses feature, which lets users create whimsical faces based on existing videos.
One final new area of growth for Snap is a possible content marketplace and distribution channel. Already companies like Tastemade, ESPN, E!, CNN and others are distributing high-quality, mobile-first media through Snap. With the average user spending 20 hours a month in Snap, it’s not a stretch to see more millennials unbundling their cable services to consume more content on Snap, and spending less time with Comcast or Netflix.
Snap is one social network that definitely continues to innovate — ephemerally, authentically… one Snap at a time.
*This post originally appeared on TechCrunch.