WHAT’S UP NEXT FOR SNAP INC.?

On eve of IPO, AR in­no­va­tion is its next big thing

USA TODAY US Edition - - MONEY - Jef­fer­son Graham @jef­fer­songra­ham USA TO­DAY

Snap Inc.’s Snapchat app has a solid lock on Mil­len­nial users, a head start in ex­plor­ing aug­mented real­ity and has dipped its toes suc­cess­fully into the world of hard­ware.

But as it plans to go pub­lic this week in an IPO that seeks to raise $3 bil­lion, there are two big ques­tions for the young com­pany to con­tend with: What’s next, and can it with­stand the heat from Face­book? The so­cial net­work, which tried to buy Snap for $3 bil­lion in 2013, has copied many of Snap’s most pop­u­lar shar­ing fea­tures for its In­sta­gram, Face­book and What­sApp units. Mean­while, in its IPO fil­ing, Snap said its user growth slowed at the end of 2016.

The warn­ing may turn away some in­vestors wor­ried Snap could be the next Twit­ter — a once-hot so­cial net­work ham­strung by stag­nant user growth — rather than another Face­book, though de­mand for the IPO is ex­pected to be strong.

Be­yond the IPO, slow­ing growth ex­plains the young com­pany’s repo­si­tion­ing as a “cam­era” com­pany that will con­tinue to draw users and advertisers by amp­ing up its unique con­tent.

One key to the fu­ture? In­no­vate in aug­mented real­ity.

AR, which adds a layer of video images over what we see in real life, “is what makes Snap unique,” says Gene Mun­ster, head of re­search for Min­neapo­lis-based Loop Ven­tures. “What Snap does with AR will de­fine their place over the next 10 years. This is their op­por­tu­nity. They need to get very ag­gres­sive on it.”

In AR, Snap broke ground with a va­ri­ety of en­gag­ing and of­ten silly fea­tures: fil­ters that add rain­bows, snow, an­i­mal ears and noses to photos and videos; stick­ers that added the lo­ca­tion of the photograph; and “geo-fil­ters” that can be cre­ated by the user and over­layed on top of a photo or video.

Last fall, Snap re­leased Spec­ta­cles, $129 video glasses that cap­ture 10-sec­ond video clips that can be shared to Snapchat. There is no AR com­po­nent to the glasses — yet. In the fu­ture, an­a­lysts ex­pect Snap to in­no­vate in new ver­sions of Spec­ta­cles that bring AR to the lenses.

“At its most ba­sic, Lenses will shift to be­come a ba­sic aug­mented real­ity-type head­set,” says Lind­say Boy­a­jian, chief mar­ket­ing of­fi­cer for Aug­ment,

“What Snap does with AR will de­fine their place over the next 10 years. This is their op­por­tu­nity.” Gene Mun­ster, head of re­search for Loop Ven­tures

which sells AR soft­ware to com­pa­nies such as Coca-Cola and Boe­ing. “They’ll take the specs and con­tinue to add fea­tures.”

The com­pany, co-founded by Evan Spiegel and Bobby Mur­phy in a Stan­ford Univer­sity dorm room in 2011, is telling in­vestors its strat­egy is in­vest­ing in prod­uct in­no­va­tion and tak­ing risks to im­prove its cam­era plat­form. Higher user en­gage­ment and ad­ver­tis­ing will fol­low, they say.

The CEO of Me­di­akix, a com­pany that works with so­cial me­dia in­flu­encers on their mar­ket­ing cam­paigns, thinks that in­no­va­tion will lead Snap to re­lease its own AR smart­phone that works with Spec­ta­cles.

“The next evo­lu­tion is to own the mo­bile hard­ware piece,” Me­di­akix’s Evan Asano notes. “Spec­ta­cles is amaz­ing tech­nol­ogy but a cum­ber­some ex­pe­ri­ence. By own­ing the hard­ware, that could all change.”

Now based in Los An­ge­les, Snapchat has be­come the big­gest name tech brand ever in South­ern Cal­i­for­nia. It cites 158 million daily users who watch 10 bil­lion hours of videos.

Its cur­rent business model re­lies on short video ads that pop up be­tween users’ per­sonal snaps. It has made in­roads into the so­cial me­dia ad bud­gets from big brands, joust­ing — like its larger com­peti­tors — for the lu­cra­tive tele­vi­sion ad­ver­tis­ing spend.

But it’s not yet prof­itable. In 2016, it re­ported a $516.4 million loss on $404.5 million in sales, mostly from ad­ver­tis­ing.

And as a so­cial net­work, it showed signs that have wor­ried some an­a­lysts of flag­ging in­ter­est. In the fourth quar­ter of 2016, av­er­age daily ac­tive users slowed to 48% growth year over year from 62% in the prior quar­ter and 65% in the sec­ond quar­ter.

Many celebri­ties and “in­flu­encers” have taken to Snapchat to show off their wares, mak­ing money by sell­ing prod­uct place­ments and men­tions to brands within the Snaps.

Tay­lor Niko­lai, a Snapchat “in­flu­encer” who makes a liv­ing mak­ing daily snaps, says Snapchat will “first and fore­most” al­ways be a mes­sag­ing plat­form.

And with Face­book’s on­slaught against Snap, he feels the com­pany has been too slow to re­spond, as it keeps quiet dur­ing this IPO pe­riod. “I’m ner­vous,” he says. “I don’t think (Snap) is the in­no­va­tor any­more.”

Fel­low Snapchat in­flu­encer Sarah Peretz notes with Face­book em­u­lat­ing Snapchat fea­tures, “I’ve never seen this kind of copy­cat­ting be­fore in so­cial me­dia to this kind of scale. ... I don’t think Snap will give up just yet, and they’ll put up a good fight.”

But will Snap still be around in five years?

“I dropped out of col­lege to be on the plat­form,” she says, “and I want to be op­ti­mistic, but right now, it’s hard to say.”

GETTY IMAGES

JEF­FER­SON GRAHAM, USA TO­DAY

Snapchat “in­flu­encers” Tay­lor Niko­lai and Sarah Peretz take Snaps of each other.

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