Snap’s Ad Business Could Slow Down Even as It Speeds Toward an IPO

Vertical video is still a challenge for agencies

Sources: Getty Images, Snapchat

Snap Inc. is set to begin trading on the New York Stock Exchange as early as March 2, and the red-hot social app hopes to pull off the largest IPO since ecommerce giant Alibaba in 2014. The mobile company is valued at up to $22 billion, with the bulk of revenue coming from Snapchat’s wacky, face-swapping lenses and full-screen vertical video ads that have flipped the marketing world on its head. But creative challenges around building bespoke content for the app, as well as increased competition from Instagram, could slow down Snap’s success in nailing down the kinds of megadeals from big agencies and marketers—like the rumored $200 million ad commitment from an unnamed holding company, reported last week by the New York Post—that it needs to compete with Facebook and Google.

Industry sources said that Snap pitched agencies on holiday campaigns during the fourth quarter of 2016, shortly after turning on its advertising API (application program interface) in October. Brand marketers, though, didn’t have the creative assets to carry out the campaigns, leaving considerable dollars on the table. According to the company’s recent S-1 filing, Snap made $404.5 million in 2016 and could earn, per eMarketer’s forecast, $1 billion in ad sales this year.

"There is an education curve with Snapchat, and that's intimidating to some brands."
-Cathy Boyle, principal-analyst, eMarketer

“Last year, [agencies] were really caught off guard or unprepared, I would say, for Snapchat ramping up as quickly as it did,” said Cathy Boyle, principal analyst at eMarketer. “So the assets that they had developed earlier in the year were not easily ported over to Snapchat because they may have been more of a landscape orientation or they were longer form—there is an education curve with Snapchat and that’s intimidating to some brands.”

Indeed, even as vertical video increasingly becomes more mainstream, advertisers have lingering concerns about going all-in on the app’s custom-formatted spots called Snap Ads. A big reason why: The platform’s creative typically takes longer to make compared to other mobile or social channels. “Asking agencies to come up with something on a really quick turnaround is probably a little more difficult on their platform than it is on other ones—it’s harder to take already-done assets and reformat them for that channel,” explained Charles Gooch, senior social strategist at VML. “If you were trying to do something specifically for Snapchat that was all by itself, it probably does take a couple more weeks to do because it’s so customized.”

For Snapchat’s part, the app added a handful of new tech companies—Celtra, Percolate, Spredfast, VidMob and ReFuel4—to its API in January that provide software to help brands edit and package their creative into 10-second clips that fit into Snap Ads. “We are already seeing significant interest from many customers that want to build better Snap Ads and streamline their process,” commented Celtra CMO Alex Saric.

Snap also offers hands-on creative services by a team of in-house strategists that work with brands to create sponsored lenses, filters and videos. Similar to other platforms, the Venice, Calif.-based player also advises brands on how to shoot TV spots so they work on Snapchat, too. For example, putting main subjects in the center of a frame make it easier to crop for a vertical screen. And Snap also encourages marketers to capture a few extra shots with talent while they are on set that they can use for Snapchat.

“There are always going to be platform nuances that we have to take into account to determine what is the best creative expression of our idea, and not all Snap Ads are created equal,” said Mike Proulx, evp and director of digital strategy and tech innovation at Hill Holliday. “What we’re finding lately is that shorter video, around six seconds, works better than taking the full 10 seconds of ad space—getting branding in sooner than later is much more favorable.”

Meanwhile, Instagram and Facebook continue to chip away at Snapchat, copying the app’s popular Stories and filters that reach millions more people. Snapchat counts 158 million daily users while 150 million people use Instagram Stories and 1.23 billion folks use Facebook every day.

“It seems like Instagram Stories is getting so much more heat and popularity—they’ve really taken what Snapchat had and are replicating it with bigger numbers,” said Julian Cole, head of communications planning at BBDO. “That’s probably the biggest concern that I have.”

Such copycat gamesmanship could be Snap’s biggest threat. “I think Snapchat’s challenge is that it needs to beat all these other platforms that can turn on [live video]. Snap is going to have to reinvent themselves,” added Deep Focus chief creative officer John Reid.

For now, Snap has a hold on advertisers’ coveted Gen Z and millennial users. While those demos are appealing for big-brand advertisers, Pivotal Research Group senior analyst Brian Wieser warned that Snap’s pitch may struggle to catch on with the broader group of Fortune 1000 marketers who aren’t singularly focused on youth. Wieser pointed to Snap’s hiring of former Viacom ad sales vet Jeff Lucas as its vp and head of global sales last year as an example of the type of advertisers most likely to fork over big budgets for the app.

“You could look into the Viacom playbook—look at which advertisers tend to be on MTV and the youngest-skewing networks,” Wieser said. “Facebook is foundational for most large advertisers, and Snap is a significant platform for advertisers who need to reach 18- to 24-year-olds. It’s a decent one for those who need to reach 18- to 34-year-olds, but it’s all pretty secondary, if not tertiary.”

This story first appeared in the Feb. 27, 2017, issue of Adweek magazine. Click here to subscribe.