How does Snap make money?

Steven Loeb · February 17, 2017 · Short URL:

It makes all of its revenue from advertising, and hasn't yet seen significant money from Spectacles

There was a lot of rumor and speculation going around for years about Snapchat (now known as Snap Inc.) and whether or not the company was making money. There were leaked financials showing the company bleeding money, and predictions that its ad revenue was exploding. The truth is, though, that we couldn't know any of this for sure. Not until the company inevitably decided to go public.

Now that Snap has filed it's S-1, for what is predicted to be the biggest IPO in years, we can finally take a look and see how things are shaping up.

As expected, the company currently makes all of its money from advertising, with products that include Snap Ads, which it describes as "vertical full screen video advertisements in the familiar Snap format." Snap Ads are played in Stories, and on average over 60 percent of Snap Ads are watched with audio on.

It also offers Sponsored Creative Tools, such as Sponsored Lenses and Sponsored Geofilters, in which the company partners with brands

The company started running ads in October of 2014 in its Recent Updates section, where users are able to post Stories, which remain visible for 24 hours. Users would be able to choose whether or not they wanted to see those ads.

It got really serious about them at the beginning of 2015 when it launched the Discover feature, as a way for editorial teams to put up their own Stories, which also, of course, included advertisements. 

The company sells ads in two ways: "Snap-sold" which is advertising sold directly to advertisers, and "partner-sold," where its content partners sell to advertisers.

The percentage of Snap-sold advertising rose in 2016, from 87 percent to 91 percent, while partner-sold advertising revenue dropped from 13 percent to 9 percent. Currently, Sponsored Creative Tools are only Snap-sold, while Snap Ads may be Snap-sold or partner-sold.

From 2015 to 2016, Snap saw its revenue growing by nearly 7x, from $58.7 million to $404.4 million. At the same time, the company saw its net loss grow from $372.9 million to $514.7 million in the same time frame, a rise of 37 percent.

Advertising won't be the company's only source of revenue for long.

In September, Snapchat announced that it was changing its name to Snap Inc, and that it was launching a new product called Spectacles, sunglasses with an integrated video camera that makes it easy to create Memories. They began showing up in pop-up shops around the country, and they gained the kind of traction and buzz that Google Glass had, without any of the blowback that the previous device had experienced.

So far, the company says that Spectacles "has not generated significant revenue."

There are other potential ways that Snapchat could make money as well. In 2014, Snapchat teamed with Square for the launch of a payments feature called Snapcash. There are is also new verticals it could expand to. In e-mails exposed during the Sony hacks, it was revealed that there have been talks between Snapchat CEO Evan Spiegel and Dennis Kooker, President of Global Digital Business & U.S. Sales at Sony, about bringing music onto the platform.

Founded in 2011, Snap has raised $2.63 billion in funding from investors that include Alibaba, Benchmark, General Catalyst, Institutional Venture Partners, Kleiner Perkins Caufield & Byers, Lightspeed Venture Partners and Sequoia Capital, among others. 

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