How risky is Snapchat's introduction of "Snap Originals"? – The madman

Break (NYSE: SNAP) recently launched Snap Originals, a five-minute streaming series for the Snapchat Discovery section. The serialized vertical videos are produced by industry veterans such as the Duplass brothers, reality TV producer Bunim / Murray Productions and the creators of Riverdale.

The first shows of the platform include the reality show Endless summer, the mysterious scripted series Class of liesand the college drama Co-Ed. Upcoming shows include Dead Girls Detective Agency, Vivian, and V / H / S.

Viacomof (NASDAQ: VIAB) Digital Studios also plans to launch ten new series for the platform, including those of MTV. Blank slate and Dirty lifeand syndicate 500 episodes of its content library. Viacom's decision to associate with Snap is not surprising because it has been trying desperately to reach young viewers who are fleeing its central cable networks MTV, VH1 and Comedy Central.

An extension of its video streaming strategy

Snap's push into the original content marks a major expansion of its previous video strategy, which included the addition of streaming clips from multimedia partners such as ComcastNBC, Disney& # 39; s ESPN, Viacom, Discovery, the NBA and the NFL section of Snapchat's Discover section, which hosts approximately 60 original shows. Snap plans to monetize his new shows with uncontrollable six-second commercials, which will air two or three times per episode.

Evan Spiegel, CEO of Snapchat, revealed that 18 of his previous shows had attracted at least ten million viewers each month and that the time spent by users watching shows had almost tripled since the beginning of the year. Among the most popular shows are Stay Stayed by NBC News, a twice-daily show that would reach five million viewers each day, and ESPN SportsCenter, which reaches 17 million viewers each month.

Each original Snapchat will also feature goals, filters and other means allowing users to share their experiences with other users. The broadcasts will also add "Show Portals", which allow users to glide and "enter" a scene via augmented reality. These portals complete the introduction of Snap Snappable AR games earlier this year.

What is the risk of this move?

Snap's investors were clearly displeased with the company's decision to launch more original programs. The stock plunged 6% to a new record low on October 10th after the announcement, though the decline was likely exacerbated by a selloff.

Investors were probably concerned that the expansion of Snap's original video content strategy would increase its operating expenses and lead to greater losses. Last quarter, Snap's total expenses dropped 2% per year to $ 620.1 million, but continued to consume 236% of its total revenue and generated a net loss consistent with GAAP of $ 353.3 million.

However, this loss still represented an improvement over the loss of $ 443.1 million in the prior year quarter. On a non-GAAP basis, its net loss increased from $ 195.5 million to $ 176.6 million. Spiegel also recently stated in another leaked memo that he had "an ambitious goal" for Snap to break even in the fourth quarter of this year and achieve "annual profitability" in 2019.

This declaration was encouragingbut spending money on original programming contradicts this strategy. Snap also plans to promote its new issues as part of a major marketing blitz, which is risky as its sales and marketing expenses grew 12% per year in the last quarter and accounted for 16% its total costs and expenses. That's why many other social media-based video platforms, such as Facebookof (NASDAQ: FB) Instagram TV (IGTV) mainly supports user-generated content.

But are investors jumping to conclusions?

On the positive side, Snap probably thinks offering new original content could increase its average revenue per user (ARPU), which rose 16% sequentially to $ 1.40 last quarter. Much of this growth – which is attributable to a higher number of cheaper automated advertisements – offset the sequential decline of 2% in its number of daily active users (DAU), which rose to 188 million. # 39; euros.

If Snap's original programs propagate virally, they could attract new users to its application. The new shows could also give Snapchat an advantage over Instagram, which already cloned most of its popular features, including ephemeral messages, short video stories and filters.

Investors should also remember that Snap's new issues have five-minute episodes each containing two to three announcements. Therefore, the production cost of a dozen episodes should be about the same as that of producing a single full episode on other platforms, while generating some much higher advertising revenue. It is highly doubtful that viewers from other streaming platforms are spending dozens of ads in a one – hour show.

The bottom line

I think that launching short original videos makes more sense than selling shows, but I'm not sure it will solve Snap's loss of DAU or significantly improve its ARPU. The video streaming market and the social media market are two overcrowded places, and Snap's original content might be difficult to distinguish from the big series on other platforms.