Why Snap’s Claim to be a Camera Company is concerning

The “Keep It Simple, Stupid” principle applies just as much to business as it does to engineering. Every business has a few places where they make the most money, and a smart business focuses on developing those areas at the expense of other areas of the business.

As Snap prepares to launch one of the biggest tech IPOs in years and investors are salivating over its prospects, I am concerned that Snap is forgetting this principle. Everyone thinks of Snap as a social media company that revolves around Snapchat. Potential investors hope that it could someday seriously compete with larger social media websites like Facebook.

But in its SEC filing, Snap claims not to be a social media company, but “a camera company” that believes “that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate.” In a video presentation released by Snap on Friday, the company doubled down on this idea that its cameras will improve communication. CEO Evan Spiegel stated that Snap wants to give people “a better way to communicate with the people they really cared about.”

While this is a nice concept, I think this emphasis on communication is not going to assuage investors who have legitimate concerns about Snap’s prospects. Snap may want to pretend that it is a camera company, but it is not. It is a social media company, and it needs to fix the problems with Snapchat if it wants to be taken seriously.

The Snapchat Spectacle Problem

For an example of why Snap’s focus on being a camera company is concerning, look at its Snapchat Spectacles. At first glance, these new spectacles appear to be a success. While Google Glass utterly failed as consumers mocked its design and worried about how it could intrude on privacy, the Snap Spectacles are stylish, have received rave reviews, and have attracted attention thanks to a smart vending machine marketing campaign. Snap has indicated that it intends to spread distribution.

But while customers seem to like the Spectacles, Snap admits that they have yet to generate significant revenue from them. Camera technology as a whole is a difficult avenue to generate money, as everyone these days has a camera on their phones and cameras can be expensive to make.

Snap claims that the ubiquity of cell phone cameras is a good thing, as they aim for integration between the Snapchat app and said camera phones. But if that is the case, then how do the Spectacles help that integration? They are a nice hardware product to be sure, but Snap needs to focus on bolstering its social media app which is where the hype around its IPO comes from. The Spectacles are a nice toy, but they are a distraction which Snap cannot afford at this time.

No Time for Boondoggles

I mean afford quite literally, as Snap’s recently released video does nothing to quell the concerns about its massive losses. As numerous analysts have pointed out, Snap over the past two years has net losses of almost $900 million over the past two years, including $515 million in 2016.

High net losses are not unusual with tech companies, but Snap has yet to offer a solid expectation for how to turn things around. As CNBC reports, chief financial officer Drew Vollero claims that “Snap is focused on cultivating a large audience” and that its revenue gains are driven by volume.

But there are two problems with a volume-driven approach. First, as Snap admits in its filing, its potential overseas is hindered both by its “very limited access to the Chinese market” and Snap’s need for good bandwidth and processing. This limits Snap’s ability to expand overseas and increase its net worth. Second, Snap is facing pressure from social media competitors who are developing similar products such as Instagram Stories.

This increased competition has caused Snap’s user growth to already slow down. If Snap continues to be unprofitable and is faced with a slowing growth rate, there is a very real possibility that it could end up as the next Twitter, whose stock has declined in value over the past two years for similar reasons.

Avoid For Now

Snap did lower its valuation from the initially expected $25 billion to a lower estimate of $19 to $22 billion, which means that it share price will be from $14 to $16. While this makes Snap a more attractive investment, its value remains high relative to its sales.

Snap may talk about being a camera company and improving communication, but that only gives the appearance that it is too cavalier about its real financial problems. Snap must emphasize the app which has investors interested in the first place, and not its Spectacles or noble talk of helping others communicate. Snapchat is what will make or break Snap, and it must focus there if it plans to turn things around.