With a nearly $18 billion valuation, Snapchat has decided it’s time to make money. The company recently launched a massive expansion of its advertising, including in-stream ads that now play in its Stories feature, as well as an API that will make it much easier for advertisers to buy ads.
Given Snapchat’s aspirations of going public, turning on the money spigot is a necessity. But for a company that prides itself on constantly innovating, Snapchat’s monetization plans are surprisingly unimaginative.
The more ads that Snapchat pushes to its users
Monetizing via ads comes with a serious downside: There’s a strong negative network effect between advertisers and Snapchat’s users. The more ads that Snapchat pushes to its users, the less value those users are likely to get out of the platform. Most users find ads to be an annoyance and little else — especially on mobile, where ads take up so much of the screen.
Many would argue that Snapchat has no choice. Other social content platforms like Twitter, YouTube, Facebook and Instagram have all monetized via ads. How else can Snapchat hope to make money?
Look East for inspiration
For inspiration, Snapchat should look East. In China, Tencent has built a platform empire that Snapchat should hope to emulate. And, Tencent has done it without relying on ads.
Unlike its Western counterparts, Tencent doesn’t primarily monetize its major platforms – the omnipresent WeChat and its desktop messaging predecessor, QQ — through ads. Instead, it makes the vast majority of its revenue through selling a combination of digital goods (like stickers and digital avatars) and Tencent-owned mobile games.
In fact, by some estimates, Tencent is the largest gaming company in the world. By channeling users through its messaging platforms to these games and digital goods, Tencent is making bank.
How much exactly? In 2015, Tencent kept pace with Facebook, with $15.4 billion in revenue compared to Facebook’s $17.9 billion. And it managed to do that without pushing away or annoying users with an endless stream of advertisements.
How did Facebook succeed?
Facebook itself tried to jump into the gaming industry back in 2012, just before it went public. But the company bungled the opportunity by allowing developers to constantly spam users with invites to and updates about their games. Anyone who was on Facebook at the time will remember the result: an endless torrent of notifications and News Feed items related to Farmville, Mafia Wars and other freemium games that encouraged their users to spam their friends in order to progress in the game.
Facebook’s developer community died off quickly once the platform moved to stop these kinds of abuses, and it hasn’t really recovered since — even as Facebook has moved to mobile. However, even this short-term experiment with gaming was a huge boon to Facebook’s bottom line. Game-related revenue made up a notable percentage of the company’s revenue as it went public, with one gaming company, Zynga, accounting for 12 percent of the company’s annual revenue at the time of its IPO.
According to TechCrunch, Snapchat has the chance to succeed where Facebook failed.
The company already has a number of augmented reality (AR) features built into its app, including the hugely popular face-swap feature, as well as other AR imaging features like fake mustaches, masks and dog ears that overlay your face as you take a photo or record a video.
Get outside and explore the world
But as the mega-phenomenon of Pokémon Go has shown, AR has the potential to go much further. While Snapchat’s filters let you play with your world, the Pokémon game encourages users to get outside and explore the world around them and experience it in new ways.
I would know — on my journey to becoming the world’s first Pokémon Go “master” who caught every Pokémon currently available in the United States, I walked an average of 8 miles a day. I explored areas of Brooklyn, Manhattan and New Jersey I never would have visited otherwise. And I met hundreds of people and made new friends that I never would have met if not for the game.
As the social platform of the millennial generation, Snapchat can do this and more. That’s why it’s time for Snapchat to go beyond the novelty factor of mustaches and dog ears and embrace the potential of AR gaming to change the way we interact with the real world and each other.
As Tencent has shown in China, the revenue potential is there. Yet the U.S. is a very different market than China, and the path of monetizing via ads is tried and true. For a company likely to go public in the near future, the appeal of quickly building up its advertising revenue is obvious. But if Snapchat takes the leap, like Tencent in China, it has the ability to build a platform empire that would rival Facebook’s.
Today, Snapchat is already the lens through which its users share experiences with each other. Now it can become the lens through which its users experience the world.