During Snap's (NYSE: SNAP) third-quarter earnings call, CEO Evan Spiegel announced the company is redesigning the Snapchat app. "There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term," he warned investors. "We're willing to take that risk for what we believe are substantial long-term benefits to our business."
Snap gave users and investors the first look at the redesigned app last week, and it certainly looks like a major risk for the company. "The new Snapchat separates the social from the media," the company wrote in a blog post announcing the redesign. That's to say social interactions with friends are now separate from Snapchat's Discover content from media companies.
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Separating the two functions may make the app more intuitive and help bring on more users, but it might also make it a lot harder for media companies to monetize their content on the app.
Revisiting Snap's top priorities for 2018
Spiegel outlined the company's three top priorities in 2018 during the latest earnings call: users, content, and augmented reality. Two of those three hinge on the app redesign.
The new app is designed to reduce the learning curve for new users. Swipe one way to chat with friends; swipe the other way to see content from media companies in the Discover section. It's pretty simple. It's also not so offensive that many existing users will abandon the platform. Assuming Snapchat sees a solid number of gross additions every quarter (which its No. 4 position on the App Store's chart suggests), it should help with user growth.
The redesign will also incorporate an algorithm to surface new content for users in the Discover section tailored to their taste. For users who are interested in consuming video content on Snapchat, it could increase the amount of time they spend in the app and the number of times they open the app per day.
Will people still consume media content on Snapchat?
Separating social interactions from the Discover channel is a huge risk. Previously, user-generated content from friends was interspersed with Discover content from media companies. That led some users (like myself) to view Discover content while seeking out content from friends. In the new app, some users will likely ignore the Discover section, reducing video views (and ad views).
Importantly, it seems like much of the time spent on Snapchat is in direct communication with friends. When asked about how much time is spent consuming one-to-many broadcasts versus direct communication in the app during the second quarter earnings call, Spiegel said the company doesn't break out those numbers.
Pushing media into a less frequented part of the app means users likely won't watch as much content -- no matter how good the algorithm is. That puts a lot of pressure on Snap's ability to monetize its direct communication between friends. Snap has done a better job than most with its lenses product, but the format still lacks the potential scale of video ads placed against content.
Facebook has struggled to monetize direct communication for years with its messaging apps. Instagram, meanwhile, has been able to improve engagement on its platform by copying Snapchat's Stories format, but it monetizes its products similarly to Facebook -- by pushing users through an algorithmically sorted feed of content from a combination of friends, media companies, businesses, and advertisers.
The new Snapchat reduces the incentive to move through a feed of content from those combined sources, because Snap is serving up one feed of the most important things to users in one part of the app and another feed of everything else in another part. That will significantly reduce the monetization capabilities of Snapchat.
Unless the redesign greatly improves Snap's ability to hold onto new Snapchat users, it's unclear how the changes will have a positive impact on the company's financials in either the short or long term.
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