In its first few days of trading, investors went pretty wild for shares of Snapchat, which is pretty amazing since the company is trying to turn a $500 million loss ($514 million in 2016) into a profit.
So how does Snap think it can make money, eventually?
One big way the company believes it can do this is by snagging TV ad budgets, a shared goal with digital giants like YouTube and Facebook. Historically, ad dollars have been slow to move from television to digital video, but when it does accelerate, Snap thinks it’s ready to pounce.
Snap first started by taking a look at its digital-video competitors. The company concluded in its S-1 that the existing video ad options were abysmal and they described it as follows:
“Two of the most popular forms of digital video advertising at the time were pre-roll horizontal video advertisements and in-feed horizontal video advertisements. Pre-roll advertisements played before the content that a user wanted to watch, leaving users feeling like they had been blocked by an advertisement and frustrated that they had to wait to see what they had selected to watch. In-feed advertisements were less obstructive, but they weren’t full screen and users often scrolled right past them — just like a banner advertisement on a website.”
According to Snap, the demo that loves their app is also the one that’s watching less television. Taking this into consideration, if the company can recreate TV ads on mobile, the potential is huge.
Swiping & Targeting
Also in its previously mentioned S-1, Snap reviewed the two main ways it thinks its ads improved on the TV experience:
Swiping up. “For example, a user who views a Snap ad about a new product can swipe up on the Snap ad to buy the product instantly from the advertiser’s website without leaving the Snapchat application.”
Targeting. Snap takes context into account to serve up the ad most relevant to the user.
According to eMarketer, there’s over $70 billion in ad spending on TV in the US alone – and Snap thinks many of those TV ad dollars are ready to go digital.
“Worldwide advertising spend is expected to grow from $652 billion in 2016 to $767 billion in 2020,” Snap wrote. “The fastest-growing segment is mobile advertising, which is expected to grow nearly 3x from $66 billion in 2016 to $196 billion in 2020. We believe that one of the major factors driving this growth is the shift of people’s attention from their televisions to their mobile phones.”
Snapchat isn’t the only tech company going for these budgets, as the likes of Facebook and YouTube can’t be forgotten about. What remains to be seen is whether television advertisers will begin to realize that this is the generation of mobile products that shifts the tide.