The Great Irony of Snapchat

By Evan Niu,

As Snap (NYSE: SNAP) continues to march toward its forthcoming IPO, investors are analyzing the social media start-up from every angle. Like most social networks, Snap's popular Snapchat service will largely be judged by investors based on user metrics, including daily active users (DAUs), average revenue per user (ARPU), and more.

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Historically, Snapchat has enjoyed incredible popularity among millennials, and one key test ahead will be whether or not the company can expand beyond this core demographic. Snap has acknowledged that "the switching costs to another platform are also low" and that this demographic "may be less brand loyal and more likely to follow trends than other demographics." Therein lies a great irony, though.

Image source: Snap.

Now you see me, now you don't

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Snapchat's initial popularity stemmed from its unique ephemerality, where photos and videos would self-destruct after a short period of time. It's not clear why the ephemeral nature of Snapchat resonated with users so strongly, enough that Snapchat has grown to nearly 160 million DAUs, but it has.

One common theory is that younger users (i.e., those under the age of 18) could send sexual content through Snapchat and feel confident that the evidence would delete itself, which could help avoid both parental scolding as well as law enforcement. Regardless, it's clear that Snapchat has since evolved beyond that early characterization and grown through network effects and users now share a wide range of ephemeral content, but self-destructing content remains a flagship feature of Snapchat.

The irony lies in the fact that disappearing content actually reduces switching costs. In other words, Snapchat's defining feature directly undermines its ability to retain users.

The value of nostalgia

Compare Snapchat to Facebook (NASDAQ: FB), which is the de facto mainstream social network. Facebook stores far more information about you, including previous posts and media that you've previously uploaded, as well as interactions you have within your network. For instance, Facebook rolled out its On This Day feature back in March 2015, reminding users of memories shared in years past. Look no further than your own Facebook feed to gauge this feature's popularity, despite some early problems with its implementation where Facebook reminded people of memories they didn't want to revisit.

Facebook's On This Day feature. Image source: Facebook.

The point is that your Facebook account includes an accumulation of past activity and content as well as the present, while Snapchat exists purely in the present. If a user wanted to theoretically ditch Facebook, they'd be giving up all that history, which would represent a fairly high switching cost. In contrast, Snapchat has no such stickiness associated with previous content. While network effects are important for all social networks, it's like Snapchat relies entirely on network effects. If Snapchat's user base was tempted to migrate en masse to another platform for some reason, they wouldn't be losing much.

And with Facebook aggressively coming after Snapchat, replicating feature after feature from the smaller service -- with Instagram Stories being particularly popular -- Snapchat has a lot to lose if it proves a lot less sticky.

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Evan Niu, CFA owns shares of Facebook. Evan Niu, CFA has the following options: long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.