It makes sense that social media advertising has exploded over the past few years. Not only have social media audiences grown exponentially, but advertisers and agencies have seen that they can use those networks’ tools to sophisticatedly target their messages to their desired audience.
Leading the charge in the world of online advertising are Google and Facebook, with Twitter as a very distant second. And now, there’s a new player in the field: Snapchat.
If Snap, the parent company of Snapchat, continues to grow its user base at its current rate, says General Atlantic President and CEO William E. Ford, it will soon be playing in the same league as Google and Facebook.
“What you’re starting to see is serious advertisers are recognizing Snap as an ad platform of scale alongside Google and Facebook, and [advertisers] want a third alternative,” Ford said in a recent interview.
General Atlantic is one of the firms that invested in Snap before the company went public earlier this year.
For now, Facebook is still far and away the largest social media advertiser. Between 1.86 billion monthly Facebook users and 600 million Instagram users, the company earned $8.81 billion in ad revenue during Q4 2016. Twitter’s 319 million monthly users generated $2.5 billion in ad revenue during the same quarter.
Meanwhile Snap’s 115 million daily users generated $2.15 in ad revenue per user in North America and Europe, where the vast majority of Snap’s users are. In emerging markets, ads resulted in 15 cents per user, earning the company about $2 billion in total, according to some quick back-of-the-napkin math.
Advertisers are taking Snap’s quick growth seriously. The company has been around since 2011 but only started doing serious advertising in 2015, when McDonald’s became the first company to pay Snapchat to run a geographically targeted advertising campaign.
“One data point last week that I think is worth knowing about is [digital advertising agency] WPP more than doubling their ad commitment to Snap this year, from under $100 million to $200 million,” Ford said.
Even with Snap’s monthly minimum CPM rate of $40,000 or so, advertising on the network is obviously worth the cost for some brands and agencies.
But all social networks, including Snap, face a conundrum: the ad revenue per user is strongly related to the number of users of that network and the number of ads displayed to those users. Since a network can share only so many ads before users begin to revolt, the best way to encourage growth is to encourage more people to use the platform.
Although Snap’s revenue per user in emerging markets is much lower than its revenue per user in North America and Europe, Snap is eventually going to have to go to emerging markets. The trouble is, Facebook has already realized that and is aggressively expanding in these markets. It has built a Snapchat clone that it’s testing in Brazil, for example, and has copied Snapchat’s Stories feature into its own social networks and messaging service.
In some countries, such as India, teenagers already use Facebook’s WhatsApp for the same purposes American teenagers use Snap—so does Snap even have a chance in India or other emerging markets Facebook has already broken into? That remains to be seen. It also remains to be seen whether Snap’s lack of expansion into emerging markets threatens its potential revenue from advertising dollars.
But even with these concerns, it’s clear that Snap has become a serious contender for advertising dollars, and investors and advertisers are counting on Snap’s ability to drastically expand its user base—and thereby its revenue and value as an ad venue.