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US-based messaging player Snapchat has officially filed for an IPO, thereby revealing details of its active user base – including geographic distribution – and the risks and uncertainties that lie ahead for the company. This data enables Ovum to provide an inside view on the growth story of Snapchat and outline the opportunities ahead for the company given the current high level of competition in the OTT communications market.

Snapchat does well in North America but struggles elsewhere

Snapchat's parent company, Snap Inc., revealed in its S1 filing to the US Securities and Exchange Commission (SEC) on February 2, 2017 that Snapchat has a relatively small but highly engaged user base of 158 million daily active users (DAUs), the majority of which are located in the US – Snapchat's primary growth engine so far. To grow further, the company needs to be more aggressive in building its user base outside of North America.

Currently, 43% (or 68 million) of Snapchat's global DAUs are located in North America (including Mexico and the Caribbean); 33% (52 million) are located in Europe (including Russia and Turkey); and 24% (39 million) come from the rest of the world. By contrast, Facebook and Facebook Messenger have 1.27 billion DAUs, with 14% from North America, 20% from Europe, and 31% from Asia-Pacific. Snapchat's quarterly ARPU data aligns with its geographical spread: Global quarterly ARPU stands at $1.05, but North American ARPU stands at $2.15. This falls to $0.28 for Europe and $0.15 for the rest of the world. Snapchat is focusing on the bigger, more developed advertising markets which will continue to dominate spending over the next five years, rather than on the faster-growing emerging markets. Much of this is due to issues that persist around delivering video advertising and video-dominated platforms in countries where broadband coverage is not reliable enough to sustain a consistent user experience.

Even though Snapchat has a much smaller user base than its rivals, the SEC filing suggests that these users are highly motivated to use the platform, creating a total of 2.5 billion snaps (short videos or photos) each day. According to Snap Inc. data, 60% of DAUs take snaps, which suggests that approximately 95 million users create an average of 26 snaps each per day, demonstrating their desire to engage with a media-rich form of communication and social networking.

In order to sustain and increase engagement among its users, Snapchat is continually evolving the social networking experience. Most of this evolution centers on the platform's Story feature which has been replicated by apps such as Instagram. The Story feature is a collection of photos, videos, and customized images curated by users throughout the day. Story takes the concept of the social network profile page to the next frontier with its focus on video and curated content created by the user themselves. Furthermore, the Story feature is a core vehicle for video ads on Snapchat, making it key to the company's ongoing monetization strategy. In order for Snapchat to cement itself as a social network or social media player (not just a communication service), it must promote Story more strongly because Story forms the basis of engagement within the wider Snapchat community. The Story feature still has plenty of room to grow: On average, only 25% of Snapchat's DAUs (40 million users) add an image or photo to their Story every day.

More worrisome for Snapchat than its low exposure outside of North America is that user growth in the rest of the world was flat over the last quarter of 2016. In fact, user growth for 2Q16–3Q16 at a global level was 7%, but the growth from 3Q16–4Q16 was estimated at around 3%. As a small disrupter in the market, Snapchat should be growing at double-digit rates. It must therefore ensure that it works on expanding its user base across all markets, especially in Asia-Pacific, which is already a media-rich, mobile-first market and could be a significant contributor to the growth of the app despite competition from WeChat and Line.

As well as strengthening its global footprint, Snapchat needs to focus on attracting users beyond its core demographic of younger users. This will not be an easy task given the competition from Instagram which has similar features and a large user base. The majority of Snapchat users are 18–34-year-olds, but users aged 25 and older visit Snapchat on average 12 times a day and spend 20 minutes on the service each day. This is a third less than the average for users under 25 years.


Further reading

OTT Communications Tracker: 4Q16, TE0003-000986 (January 2017)

Video on Messaging Platforms: Snapchat could be a major video platform, ME0002-000728 (January 2017)

2017 Trends to Watch: Communications Services, TE0003-000980 (December 2016)

OTT Messaging Forecast: 2016–20, TE0003-000952 (September 2016)

"Chat apps set to disrupt the mobile app store," TE0003-000998 (February 2017)

"Why Twitter is wrong about the future of mobile video advertising," TE0021-000002 (February 2017)

"Team Facebook will close in on 2 billion MAUs in 2017," TE0003-000992 (January 2017)


Neha Dharia, Senior Analyst, Consumer Services

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