At first — or even second — glance at Snap’s S-1 it’s easy to see why many are drawing a comparison to Twitter. Like Twitter, Snap is losing a lot of money; like Twitter, Snap’s growth rate is slowing; and, like Twitter, Snap is actually losing leverage.

To see what I mean by the last point, consider this chart of Facebook at the time of its IPO:

Daily Active Users (in millions)

Revenue per User (in dollars, as are all the rest)

Cost of Revenue per User (i.e. the actual cost of running the service, like running servers, paying partners, etc.)

Total Costs per User (i.e. cost of revenue plus the cost of running the company, including engineering, marketing, etc.)

Profit per User

This is a pretty good chart on the verge of an IPO: Facebook’s cost of revenue per user was holding steady, which meant every additional user cost about the same to serve as the previous user; the company wasn’t gaining leverage, but it wasn’t losing it either. Total costs, meanwhile, were escalating just a bit, which meant Facebook was spending slightly more per user than before (likely because of a mid-2011 acquisition spree), but the situation was largely under control. That meant that Facebook’s profits would grow as long as it grew either average revenue per user or the total number of users; the company is such a juggernaut because it has continually done both.

Twitter, meanwhile, wasn’t as bad as people (now) remember:

Like Facebook, Twitter’s cost of revenue per user was basically flat; total costs were higher than Facebook’s, and had taken a recent upturn thanks to the acquisition of MoPub, but that was assumed to be temporary. As long as Twitter could grow revenue per user or the total number of users the company would be profitable; if it could do both it too could be a juggernaut. Obviously things didn’t turn out that way, in part because user growth was already slowing, but also because Twitter’s costs never flattened out; since the MoPub acquisition the company has spent around $1.24 for every $1 in revenue brought in. Had the company simply kept its pre-IPO cost structure it would be in far better shape today.

Snap is actually in worse shape than either:

The biggest problem here is Snap’s cost of revenue per user: it’s going up, and it has been for a while. This isn’t quite as bad as it seems, because Snap’s cost of revenue includes revenue sharing payments to publishers; once you back that out, though, the company has gone from paying ~$0.47/user in 2015 to ~$0.66/user in 2016, a 40% increase, and an amount (per user) that well exceeds that of Facebook or Twitter at the time of their IPOs. That means that to become profitable Snap has to not only grow users, it has to grow them faster than its costs are increasing, or grow revenue per users by that much more.

What is the most fascinating, though, is Snap’s insistence that it has no choice.

Snap’s Gingerbread Man Strategy

Snap’s S-1 is a remarkable document, because its strategy is remarkable. To quote:

Our strategy is to invest in product innovation and take risks to improve our camera platform. We do this in an effort to drive user engagement, which we can then monetize through advertising. We use the revenue we generate to fund future product innovation to grow our business. In a world where anyone can distribute products instantly and provide them for free, the best way to compete is by innovating to create the most engaging products. That’s because it’s difficult to use distribution or cost as a competitive advantage—new software is available to users immediately, and for free. We believe this means that our industry favors companies that innovate, because people will use their products. We invest heavily in future product innovation and take risks to try to improve our camera platform and drive long-term user engagement. Sometimes this means sacrificing short-term engagement to introduce products, like Stories, that might change the way people use Snapchat. Additionally, our products often use new technologies and require people to change their behavior, such as using a camera to talk with their friends. This means that our products take a lot of time and money to develop, and might have slow adoption rates. While not all of our investments will pay off in the long run, we are willing to take these risks in an attempt to create the best and most differentiated products in the market.

Most companies use their S-1 to explain how they are building a sustainable competitive advantage — a moat, if you will. Snap is declaring that moats no longer exist; all it has is the Gingerbread Man strategy:

Run, run, run as fast as you can.

You’ll never catch me, I’m the gingerbread man.

That’s why the cost of revenue must rise; Snap explains:

Providing our products to our users is costly, and we expect our expenses, including those related to people and hosting, to grow in the future. This expense growth will continue as we broaden our user base, as users increase the number of connections and amount of content they consume and share, as we develop and implement new product features that require more computing infrastructure, and as we hire additional employees at a rapid pace to support potential future growth. Historically, our costs have increased each year due to these factors, and we expect to continue to incur increasing costs.

The payoff, though, at least in Snap’s telling, is a big opportunity to dramatically increase the average revenue per user by capturing technology’s white whale — television advertising money:

Worldwide advertising spend is expected to grow from $652 billion in 2016 to $767 billion in 2020. 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. This trend is particularly pronounced among the younger demographic, where our Daily Active Users tend to be concentrated. According to Nielsen, people between the ages of 18 and 24 spent 35% less time watching traditional (live and time-shifted) television in an average month during the second quarter of 2016 compared to the second quarter of 2010.

Snap goes on to explain how its concentration in western markets, particularly the United States; the quality of its ad units (especially relative to Facebook); and the depth of engagement it drives with the most desirable demographic for advertisers, set the company up well to capture enough advertising that not only justifies the company’s increasing costs but actually provide a profit — as long as the company keeps innovating.

To summarize, Snap’s strategy is to:

Deliver innovative and differentiated products that…

Cost a lot to deliver but…

Capture the best customers…and PROFIT!

That’s definitely not Twitter; indeed, the real analogy for Snap is from another part of technology entirely: it’s Apple.

Snap, Apple, and Humanity

Seven years ago, well before I started Stratechery, I wrote a paper in business school called Apple and the Innovator’s Dilemma; it concluded like this:

The secret of Appleʼs success is about design and a different way of thinking. Design at its essence, is not just about form, and not just about function. Instead, itʼs both, and more. It is ultimately about the user and delivering exactly what they need, not just what they say they want. Apple takes it as their responsibility — what customers pay them for — to both know technology and customers better than customers know themselves and deliver products that truly surprise and delight… Moreover, it is a way of thinking that Apple does not have a monopoly over. It requires acknowledging that there are product attributes that cannot be measured, and that value means much more than money. It also requires thoughtfulness and patience, and a broad appreciation of people and culture. Escaping the Innovatorʼs Dilemma is about escaping the operational mindset that is the current ideal in much of business. In short, there are few other companies like Apple because no one dares or is allowed to think different, not because it is impossible.

Compare that to this paragraph from Snap’s S-1:

Our drive to create new things comes from the belief that we can create products that will improve the lives of the people who use them. We believe it’s always worth trying to build something that will empower people to express themselves, live in the moment, learn about the world, and have fun together — even when it’s not clear that what we build will be successful or make money. While we get many of our ideas by listening to our community, sometimes it takes a long time to get the product solution just right. Even when we have the right solution, it’s often in the form of a new product that might take a while for our community to learn how to use. Just because products are sometimes confusing when they’re new doesn’t mean we are going to stop building innovative products for our community. Part of the joy of using Snapchat is discovering new features and learning how to use all of the products that we create.

Snap gives the example of Stories:

Our community started asking for an easier way to send a Snap to all of their friends, not just one or two at a time…Some people in our community asked for a “Send to All” button, but we thought this might encourage users to spam each other by making it too easy to send a Snap to everyone very quickly, ruining what made Snapchat personal and fun. We learned that our community often shared things with all of their friends using social media, but we also heard that traditional social media was confusing because the typical feed placed every update in reverse chronological order. If you posted photos from a birthday party and then viewed them in the feed, the first photo in the feed would be from the end of the party, and the last photo in the feed would be from the beginning of the party. Our community wanted to view updates in chronological order, the way that they were experienced. That made sense to us because humans have been telling stories with a beginning, a middle, and an end for a long time. While we understood why people used social media, we didn’t want to make a traditional profile on Snapchat because we knew from our experience with delete by default that people didn’t like the burden of accumulating perfect moments for their friends. Our community wanted to express themselves and tell stories in a way that embraced change and growth. In October 2013, slightly more than two years after we first launched Snapchat, we introduced My Story. Stories are collections of Snaps viewed in chronological order that expire within 24 hours. Every user on Snapchat has their own personal and ephemeral Story that can be viewed by all of their friends. With Stories, every day begins anew.

This too is remarkable: not only is Snap not promising a traditional moat, it is in fact selling its humanity as a company. That the company and its Steve Jobs-admiring CEO in fact do understand users better than everyone else, that that will result in a sustainable differentiation, and that the prize will be the top end of the advertising market.

Without question Apple’s ongoing success lends credence to the idea of humanity as a differentiator; the challenge for Snap, though, is that that approach didn’t work too well for Apple the first time around.

Facebook = Microsoft

Perhaps the single most misunderstood fact about the most misunderstood episode in tech history is that the Macintosh computer never had a chance against Windows. Sure, “Windows” launched after the Mac, and certainly leaned on Apple’s creation for product inspiration, but the fact that mattered was that it was built on DOS — and it was fully backwards compatible. That meant that all of the businesses that had already bought PCs — the DOS-running IBM PC had launched three years before the Macintosh, and was a massive success — along with all of the software that had already been created for DOS, were going to buy/run-on Windows. The competition was over before it began, no matter how much humanity may have been in the Macintosh’s design.

Today, if Snap is Apple, then Facebook is Microsoft. Just as Microsoft succeeded not because of product superiority but by leveraging the opportunity presented by the IBM PC, riding Big Blue’s coattails to ecosystem dominance, Facebook has succeeded not just on product features but by digitizing offline relationships, leveraging the desire of people everywhere to connect with friends and family. And, much like Microsoft vis-à-vis Apple, Facebook has had The Audacity of Copying Well.

The trouble for Snap is that if this comparison holds, the company may indeed be in danger of being like Apple — the 80s version, that is. Facebook is already threatening to saturate the direct response market for mobile — the analogy would be to Microsoft’s hold on the enterprise — and just as the consumer market Apple built the Macintosh for never really materialized, the same may be the case for the long-awaited shift of TV brand advertising to mobile.

That, though, is the key to Snap’s insistence it is a camera company. What changed for Apple the second time around was that there was a paradigm shift — and in paradigm shifts, the incumbents’ lock-in evaporates. Again from the S-1:

In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones. This is because images created by smartphone cameras contain more context and richer information than other forms of input like text entered on a keyboard. This means that we are willing to take risks in an attempt to create innovative and different camera products that are better able to reflect and improve our life experiences.

Snap’s bet is that Facebook, with all of the baggage of putting your best self forward, will never be truly able to step into this brave new future. No, capturing that future won’t be as simple as re-making the connections you already have — new users will need to be won, feature by feature and innovation by innovation — but that is exactly what Snap insists it does better than anyone else.

So will Snap succeed?

The trouble for the company is that some of the conditions necessary for its success are out of its hands: on a macro level, the timing of The Great Unbundling, an important aspect of advertising moving away from TV, is as uncertain as ever. On a competitive level I suspect Snap is more surprised than anyone at how effectively Facebook has leveraged Instagram to foreclose Snapchat’s growth.

I do, though, have faith in Snap itself: Spiegel and team are the most innovative in tech, brilliantly laddering up to new opportunities, and creating new markets. The products will be great; we’ve known for 30 years, though, that that is not always enough.

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