Monday, May 7, 2018

Betting they wish they would have taken the check from Facebook

This piece on the fall of Snap Inc. by the indispensable Michael Hiltzik plays like a greatest hits of badly run tech businesses, but as much as I'd like to go over every juicy embarrassment, like an ownership structure that theoretically allows the none-too-competent founders to control the company from beyond the grave (assuming it outlives them), I can't reprint Hiltzik's whole article, so I'm going to have to narrow my focus to our ongoing thread about the Ponzi threshold and the way that hype and next-big-thingism distorts markets and drives bad decision-making.

Just to review, he basic idea [of a Ponzi threshold] is that sometimes overhyped companies that start out with viable business plans see their valuation become so inflated that, in order to meet and sustain investor expectations, they have to come up with new and increasingly fantastic longshot schemes, anything that sounds like it might possibly pay off with lottery ticket odds.

With Snap, we have a slightly different version. Instead of focusing on the fantastic longshots, the company is damaging its growth potential and alienating their users in order to get a quick boost in revenue, but the underlying dynamic is the same. You start out with a good product that could be the basis of a profitable medium-sized business, but the sky-high valuation creates equally inflated expectations. In order to justify the price tag, good business plans are pushed aside for bad ones.

Snap Inc. again shows why it should not have become a public company

To recap, Snap fell short of virtually every expectation Wall Street had set for the first-quarter report. The Venice-based app developer reported revenue of $231 million, below consensus expectations of $244.5 million. Its daily active users — the essential metric for online services — came in at 191 million, short of expectations of 194 million. The company lost nearly $386 million in the quarter.


Pressed by the analysts to explain how he plans to reverse Snap's dismal results, Spiegel kept referring to the company's "mission" — seven times in the half-hour call, by my count. Sounding like a bargain-basement knock-off of Mark Zuckerberg, he described that mission as helping to "empower people to express themselves, live in the moment, learn about the world and have fun together." This is a high-faluting way of saying that Snap distributes a smartphone app, Snapchat, aimed at young users who use it to communicate with friends via messaging and short videos of themselves, and sells advertisers space on the screen.


Spiegel, 27, and his co-founder Bobby Murphy, 29, traded that in for a big payday at the IPO, which ludicrously valued the company at $33 billion and raised nearly $2.5 billion, making them each multimillionaires and, on paper, billionaires.

This would be marginally acceptable if it were indisputable that Spiegel and Murphy know what they're doing. On this, the jury is still out, but the evidence isn't encouraging. Early this year, the company rolled out a redesigned app that has met with near universal condemnation by users, scads of whom have taken to YouTube and other venues to vent their displeasure, often with verbiage not acceptable on this website.

Simply put, the app originally displayed a user's chat messages with friends with one swipe of the screen. An opposite swipe brought up video "stories" from friends and others, interspersed with paid advertising that was relatively unobtrusive and easy to ignore.

In the redesign, the chat and "stories" are displayed together, and advertising and paid messages get their own space. Users complain that this is confusing, makes it difficult to find their friends' most recent messages and most relevant stories, and gives advertisers too much unavoidable presence. "A lot of people are going to flee the platform, much like myself," a video performance artists named Davison posted on YouTube. "Now it's this bloated, complicated mess." Anecdotally, it seems that many Snapchat users are heading to Facebook's Instagram app.

When he introduced the Snapchat redesign late last year, Spiegel told users the goal was to make it "more personal" for its users, including by providing advertising "personalized just for you." But what really drove the redesign, plainly, was giving advertisers more access. "We listened to our advertisers very closely," Khan told the investment analysts.

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