Why Facebook Will Maintain Its ARPU Advantage Over Snapchat

Facebook (NASDAQ:FB) generates most of its revenues from online advertising. In 2016, the company made $26.88 billion from online advertising, nearly 97% of its total revenues. Most of these ads are self-serve ads that appear on the News Feed and the right-hand column of most Facebook pages. These ads can be highly targeted to appear to specific users, and thus command a premium over many other ad formats such as search ads and Product Listing Ads (PLAs). While Facebook offers its advertising services all around the world, nearly 50% of its revenues still come from the North American market, making it the most profitable region for the company. Considering that the North American market is the most lucrative online ad market, Facebook faces significant competition from companies such as Snap (NYSE:SNAP). However, given its massive user base and significant amount of user data, Facebook still holds the advantage in the market. Below we take a look at some of the key performance metrics for both Facebook and Snap, and discuss whether Snap will be able to truly challenge Facebook in the market.

Facebook’s Users Are More Valuable Than Snap’s

Based on the figures disclosed in each company’s filings, we estimate that Facebook’s Average Revenue Per User (ARPU) was $53 in 2016, which is significantly higher than Snap’s $6. A big reason for this massive discrepancy is the fact that Snap began monetizing its user base much more recently than Facebook. We forecast Snap’s North American ARPU to increase to $65 by the end of our forecast period, which would be impressive growth. However, we still expect Facebook to maintain its sizable advantage, as we forecast its North American ARPU to reach about $110.

Why Facebook Will Maintain Its ARPU Advantage

We expect that Facebook will maintain its substantial ARPU advantage over Snap throughout our forecast period. The primary reasons for this expectation are as follows:

• Facebook has a platform that can be leveraged across various screens (laptops, smartphones, tablets). It also has the necessary ecosystem of applications – Facebook, Instagram and Whatsapp – that can help the company surface relevant ads on its platform based on user browsing and messaging behavior. On the other hand, Snapchat is a standalone app that is still ramping up the monetization of its user base, and generally doesn’t have the depth of user data that Facebook possesses.
• Facebook has successfully replicated Snap’s entire photo sharing/camera experience – ranging from Stories to the original ephemeral messaging – across its various platforms. This has yielded significant results for the company. For example, Instagram Stories reached about 200 million daily active users in less than a year post-launch, well ahead of Snap’s total user base. Facebook has the financial resources and user reach to consistently add new features to its apps, which can help the company improve its user engagement and ad targeting capabilities. This should help drive ARPU growth.

Overall, Facebook will likely continue to command a higher ARPU compared to Snap and other competitors, as a result of its reach, its massive amounts of user data, as well as its financial muscle. This should allow it to continue to grow its ARPU and maintain its edge.

Please refer to our complete analysis for Facebook here.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research