Can Snapchat Carve Out A Niche For Itself In The Mobile Video Market?

by Trefis Team
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Snap (NYSE:SNAP) has been making an increasing push into TV-style video content, as it tries to monetize the quickly growing mobile video space, leveraging its young and lucrative social media user base. Over the last several months, the company has signed deals for original content with the likes of  NBCUniversal, Turner, Discovery, ESPN, Vice Media to create 3 to 5 minute long video content that will be available on the “Discover” section of the Snapchat application, which features curated media content. Snapchat’s first original show “Good Luck America”, which launched in 2016, averaged 5.2 million viewers per episode in its second season (up 53% over season one), indicating that the company is gaining traction. Below, we take a look at whether Snap’s move to make original video content a more central part of the overall Snapchat experience could pay off.

Trefis has a $17 price estimate for Snap, which is around 20% below the current market price.

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Snap’s Take On Mobile Video

The media consumption habits of millennials – who constitute a vast majority of Snap’s user base – are quite fragmented, with digital media consumption accounting for an increasing mix of their time. This presents an opportunity for Snap, which has one of the most popular and engaging social media platforms in the U.S. As of the last quarter, Snap users spent upwards of 30 minutes per day on its app. Although the digital video space is becoming crowded, Snap has a track record of outside-the-box thinking with creating products focused at younger users (ephemeral messaging, lenses and stories). For instance, Snap’s video content is vertically oriented, much like the rest of its app and most shows are subtitled, given that many users often watch content with sound turned off. At present, videos are only available for a limited amount of time, like Snap’s other content. Moreover, content is typically produced or tailored according to Snap’s format, unlike other digital video platforms where long-form linear TV programming is often edited into shorter clips.

The Economics

Snap relies on TV networks to fund and produce their shows, and it does not pay for shows upfront unlike cable and satellite-TV operators. Instead, it splits the advertising revenues (typically 50-50 basis) with the networks, making for a relatively capital-light model. Snap typically displays three 10-second advertisements currently for each show. Ad rates should be higher than regular Snap ads due to the video content as well as the appeal of Snap’s audience, which is becoming increasingly difficult for marketers to reach via traditional media. For example, millennials spent about 27% less time watching traditional TV compared to those in the 35+ age group, according to a study from Nielsen (89% of video time spent on TV for ages 35+ vs. 66% among millennials). About 75% of daily viewers for Snap’s video shows reportedly lie in 13-24 age group.  Snap has been creative with its social media ad strategy, creating ad formats that don’t necessarily feel like interruptions and it is possible that it could deploy a similar strategy for video as well.

The Competition

The video market is becoming increasingly crowded. Besides well-established online video platforms such as YouTube, Snap’s key rival Facebook (NASDAQ:FB) is also betting big on this space. The social media behemoth has an audience that is more than 10 times as large as Snap’s, making it a more appealing platform for content creators and advertisers seeking greater reach. Facebook also has much deeper pockets, allowing it to invest upfront in TV-style video. Moreover, Facebook has adopted a fast follower strategy, steadily copying Snap’s best features across its apps over the last year, and there is a possibility that it could copy Snap’s distinctive approach to videos as well.  Moreover, Snap’s videos have some entry barriers for content providers who need to produce bespoke content, which can cost upwards of $6,000. Facebook uses more conventional formats, allowing for a significantly larger library.

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