What Snap Inc Wants From Drones

By Motley Fool Staff Markets Fool.com

Recently public social media company Snap (NYSE: SNAP)has been making a few head-scratcher decisions with their marketing strategies lately, not the least of which is its growing interest in drone technology. While it makes sense for companies like Appleand Google (NASDAQ: GOOGL) (NASDAQ: GOOG)to pour money into moonshot technology projects, it's a bit more of a confusing move for Snap to make.

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In this clip fromIndustry Focus: Tech,tech sector bureau chief Dylan Lewis and contributor Evan Niu talk about what Snap might possibly want from their investment in drones, a few reasons why putting so much money and time into drones is probably ill-advised, and more.

A full transcript follows the video.

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Dylan Lewis: The next piece of news we're going to talk about is even more bizarre. According to reports fromThe New York Times, the company had other hardware ambitions, namely drones. At the moment, details are scarce, but several anonymous sources at the company confirmed Snap has been pursuing a drone camera project. I guess the thought here is, drones would allow aerial Snaps, it would allow people to capture video and images in a more novel way and a cool landscape way. Again, this seems kind of crazy to me, for this to be the focus.

Evan Niu:[laughs] Yeah. It makes no sense to me. As ridiculous as the Spectacle thing is, trying to brand a company around those, the drone thing also makes no sense to me. It's hard to imagine someone buying a drone. First of all, it's hard to imagine Snap coming out with a drone that is competitive with what's already out there fromDJIand even GoPro. Look at even GoPro trying to get into drones -- they've had a lot of trouble. A company like GoPro that had experience making cameras still has trouble making a really compelling drone that has all the full features that people expect nowadays.

Lewis:They famously had to recall one of their products, because they were having trouble with it.

Niu:Yeah, because the battery was loose. If you shook it, the battery would move by a millimeter and the contacts would lose power, which is a really simple and kind of embarrassing problem. It was such a silly little mistake, and it probably had something to do with their manufacturing or something, I don't know. But yeah, the point being, GoPro hasn't really pulled off the drone thing very well either. And they were probably much better-positioned to make that kind of jump in the first place. And, of course, this is just a report that they're working on. Who knows if they actually do it. I hope they realize that it's a bad idea, and probably save everyone a bunch of headaches if they just don't do it at all. I mean, I guess it's not surprising that they have looked into it, since they want to become a camera company. But whether or not they actually do it, I think the chances are probably against it. I would hope so.

Lewis:Yeah. I get that, it's tempting to be a tech company and have these really sexy side project. You see the stuff thatAlphabethas done with Google's self-driving cars. That is so far afield from their core search property. Evengetting into virtual reality on the hardware side with Oculus. But, you look at those two companies, those are businesses that have a cash cow underlying all of these futuristic R&D projects. Their core platforms, their ad-selling platforms are doing wonders for them, and are allowing them to throw money off on the side, and see what happens with these more futuristic, hard-to-pin-down-what-the-impact-might-be type projects. I think with Snap right now, there's a little bit of a focus concern on my end, because you haven't really figured out your core platform yet, you haven't monetized it really well. You're still rolling ads into it and building it into the user experience. And, you have like 3% quarter-to-quarter user growth. You have so many issues with what should be your core focus, I'm not really sure why they're doubling down on theirhardware initiatives, if this is something they're really spending a lot of time on.

Niu:That's a good point, I agree completely. Why aren't they focusing on getting the core business up and running in a good way? They're just now really rolling out these ads. Of course, in advertising, your ability to target ads is really critical in delivering value to your advertisers, who arethe actual customers. That's who pays you. Facebook does a really good job with ad targetingbecause they have so much of your data. Twitter, I think, has had some troubles, which is partially why they're not monetizing as well as they should be. So, I guess the question is, how much user data can Snap really get, and how valuable will that be? Most of the stuff you're putting on Snapchat disappears immediately. What kind of data can they gather that's going to be really useful to turn around and use for targeting? It's kind of the same thing with Twitter. A lot of times, people can view tweets publicly without having to sign in, which limits Twitter's ability to gather data on them, which is also why it's harder for them to monetize their users. It's a big question on execution going forward, how they can really grow this ad business. If they can, this will do well. They are very new to this.

Lewis:Yeah, it's something that I think they really have to figure out still. You look at the data points that Facebook and Google have on their users, and you're right, it's totally different, the profile is so robust for what people have on their Facebook. They know all my interests, they know everything I like, and they're able to incorporate that into the algorithms they're using to feed stuff up to me. Google knows exactly what you're searching for, and can serve up hyper-relevant stuff. With Snap, they know your friends, they know your demographic, and maybe they know some of the outlets that you're typically interested in on the story side. But I think they still need to do a ton to figure that out, and I'd rather see them doubling down there than going further afield with some of these hardware projects.

Niu:Yeah. The big emphasis on hardware in general is confounding to me. I don't understand why they're doing it, or why they're trying to make this pivot -- if you want to call it a pivot. They should just get down to working on their actual ad platform, focus on the software-as-a-service stuff, before they really start dabbling in this hardware stuff. Hardware is hard.

Lewis:And the way that their hardware is set up, too, their Spectacles are built-in to integrate with Snapchat. They're not really a device that you can use across platforms.

Niu:Well, you can export, and it exports in a circular format as opposed to the square formatthat most people see. So, there is a way that you can export content that you take on Spectacles. But, yeah, the point is, you would think they would want to tie exclusively to the platform. But then, it's like, why would you buy some product that's only available for this platform? Conversely, if it's not a good product, if it works on all platforms, why would you buy it unless it's the best product out there? It's this really weird Catch 22. Imagine, would you buy a product that could only submit stuff to Facebook? It doesn't make any sense. Butthat would be the differentiating factor. But yeah, theirwhole strategy makes no sense to me.

Lewis:Yeah,it seems a little backwards. The point that I was going to make is just,the biggest salesman for the hardware stuffis going to be people being on the platform in general. The addressable market for those products is going to bewhatever the user base that they have is. Right now,it's around 160 million daily active users. The mostcompelling way to make thathardware business look appetizing is tocontinue to grow that user base, thenmaybe you have people that want somethingthat's a little bit more dedicated. I'm still skeptical of that. Butultimately, that logic ties back to,build the platform out and grow the user base, andworry about hardware second, right?

Niu:Yeah,I agree.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of Alphabet (A shares), Apple, and Facebook. Evan Niu, CFA owns shares of Apple and Facebook. Evan Niu, CFA has the following options: long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Facebook, GoPro, and Twitter. The Motley Fool has the following options: long January 2018 $90 calls on Apple, short January 2018 $95 calls on Apple, short January 2019 $12 calls on GoPro, and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.