Are Spectacles Really Worth it For Snap?

By Motley Fool Staff Markets Fool.com

The launch of Snap's(NYSE: SNAP)Spectacles product made it clear that the company is working to position itself a "camera company." In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, discuss how Spectacles may be more trouble than they're worth.

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A full transcript follows the video.

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This video was recorded on May 12, 2017.

Dylan Lewis:Whydon't we start with Spectacles? I knowleading up to their IPO, one ofthe biggest things I was wondering was,what is this doing for their business? This ishardware, we think of them as a software and platform play. Are theygetting anything meaningful there? Whatyour take on what's going on?

Evan Niu:It'sweird because Spectaclesseems to be the basis for why they rebranded themselves acamera company, because now they make a camera product. But, we've talked about this before, it's a strangeidentity to try to carve out for yourself. But,they have started disclosinga little bit more detail about Spectacles. They said last quarter, Spectacles revenue was about $8 million. Atthe same time, they'vealso broken down their costs in more detail, which is very useful for investors. We talked about the hosting costs, which they broke out. But, if youlook at this other category, other cost to revenue was about $20 million,and I'm pretty sure that ispredominantly related to Spectacles, ifyou look at thelanguage in their filing. If you think about it, that's operational, theonly other real part it could be. The revenue, $8 million, and the cost was $20 million, soobviously they're losing about $12 millionin the quarter on Spectacles on the hardware side. Andthat includes buildingthese machines and having inventory costs, andall the physical logisticsassociated with physically selling a product, which, this is thefirst time they've ever done that. So, they'reprobably losing a bunch of money upfront. Hardware is, of course, naturally very hard to doas a sustainable business in long term, whereyou can have product cycles and get people to constantly buy your product. But,in terms of engagement,I think it's very interesting because it doesn't seem like Spectacles do a whole lot in terms of engagement, either.

On the call,Spiegel said there have been 5 million Snapscreated via Spectacles to date. Spectacles launched inNovember. At the same time, they said in the first quarterthere were three billion Snaps per day created. So,throughout the whole quarter, we're talking about 270 billion Snaps that arecreated on the platform. Less than 5 million of that comes from Spectacles. If you do the math, that's 0.002% of Snaps created -- less than that because that's just in the quarter. So,it just begs the question,why are you doing this? No one is using these things in a meaningful way. It'sliterally a rounding error at this point, 0.002%. Who cares about that?

Lewis:Yeah,that's basically a footnote, right?

Niu:Yeah. You'relosing money, you'reputting all this effort into it, you'reprobably hiring a bunch of people to work on these thingsand whatever comes next in the product pipeline on hardware. And they're not doing anything in terms of engagement,users aren't really using them, and now you're jumping into this space oftrying to develop camera hardware, which, the other 99.998% of usage is coming from smartphone cameras. Smartphone cameras are amazing these days. There's no way that Snapis going to come out with a better camera thanAppleorSamsung. So, why? It makes no sense to me. They'relosing money, they're not helping engagement, and there's no way they can actually compete.

Lewis:Yeah,when I first saw them doing this, I thought they were really smart in creating a lot of buzzevery time that they launched a new location, they woulddrop these vending machines that had a limited number of Spectacles in the middle of these remote spots, or in city areas. Theywound up gettinga ton of press for it. I thought it was a really brilliantmarketing play, and it built a lot of awareness for the company. But there's a bigdifference between building buzz and being a viable product segment. I don't think that investors should expect a whole lot to be coming from the Spectacles or thehardware segment any time soon,if ever,just because, like you ran through theeconomics right there, and they're really not that great forthe business.

Niu:Yeah. Idefinitely agree that the launch was a verysuccessful marketing campaign, becauseeveryone was buzzing about it. There was a lot of hype around these things. So,I definitely agree that the event was successfulas a marketing event. But, now that we'restarting to get somenumbers out of the company, in terms of usage and financials, it just doesn't seem worth it to me.

Dylan Lewis owns shares of AAPL. Evan Niu, CFA owns shares of AAPL. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has a disclosure policy.