Snapchat used to be proud of its confusing design — the look made sense to its users, and that's the only audience Snap wanted. But now, after a disastrous earnings report that showed it's not picking up new users as quickly as expected, the company said Tuesday that it's planning a total overhaul.
The catch? It has no idea how it will be received.
“We’re willing to take that risk for what we believe are substantial long-term benefits to our business,” said Evan Spiegel, Snapchat's chief executive.
That's hardly the kind of talk that inspires confidence. Piled on top of a report of $206 million in revenue against expectations of $238 million, it may have helped topple the stock. Shares of Snap fell as much as 22 percent in after-market trading from its closing price of $15.12, following the earnings report. They were trading down by nearly 17 percent midday Wednesday after an SEC filing revealed that China's Tencent, which owns WeChat, bought a 12 percent stake in the company.
The company reported 178 million people use its service daily, falling short of an expected 180.5 million. Snap also confirmed reports that its major foray into hardware, Snapchat Spectacles, had been a failure and cost the firm nearly $40 million. That's another blow to Snap, which labeled itself as a “camera company” in its filing to go public. Spectacles may not have been expected to generate much revenue, but it was a core branding product for the company.
Snapchat was upfront in its initial public offering filing that it would struggle to turn a profit, and that its greatest appeal was with younger users — a notoriously fickle cohort of tech users. But the main focus of analysts' criticism this quarter was centered on Snapchat's advertising strategy, which is key to turning its popularity into financial success.
Analysts have long been skeptical about Snapchat's advertising, particularly as it faces the solidifying duopoly of Facebook and Google. When the company went public, many said that its advertising engine was unproved, especially on the scale needed to fight with those advertising giants.
The firm is “having an Everest-like uphill battle getting new advertisers onto the platform,” said GBH Insights analysts Daniel Ives in an emailed note to investors after the earnings report.
The planned redesign will be an attempt to make the network more intelligible to newcomers and advertisers who want to leverage Snapchat's popularity. Like Twitter before it, however, Snap has identified a potential problem that could hurt its evolution: its own devoted users.
Loyal Snapchat users know and like how the social network operates, which may make any redesign run the risk of alienating the users Snap already has in pursuit of persuading new people to use its service. In prepared remarks to investors, Spiegel hinted that Snapchat may take a leaf out of other networks' playbooks and use data analysis to personalize the content users see.
“We are developing a new solution that provides each of our 178 million Daily Active Users with their own Stories experience leveraging the tremendous benefits of machine learning without compromising the editorial integrity of the Stories platform that we have worked so hard to build,” Spiegel said.
Meanwhile, other tech companies are busy making their own versions of Snapchat's greatest innovations. Facebook has already made its own version of Snapchat Stories for its primary network and Instagram. Augmented reality, another area Snapchat was fast to move into, is now a main focus for Apple as well as Microsoft and Facebook.