Social Media

Snapchat won't likely be a top ad player, but experts say it doesn't need to be

Patrick T. Fallon | Bloomberg | Getty Images

Snapchat boasts one of the most popular apps among young people, growing interest among advertisers and — unlike other richly valued start-ups — is planning on going public next year.

Does parent company Snap's growing digital ad business pose a threat to digital advertising leaders Facebook and Google? Not anytime soon, say ad industry experts. But it probably doesn't have to.

Snap can build a lucrative and highly profitable billion-dollar ad business within the next few years, even if it doesn't rival the top players, according to analysts and several media executives.

"There's a lot of money to go around," said Cathy Boyle, principal analyst at eMarketer. "The challenge for anyone outside those top five companies is how much is going to be left for all of them to share. ... There's still [ad] money to be moved from traditional channels into digital. That's where these other companies, anyone outside the top five, have the ability to compete to get those funds."

In addition to Google and Facebook, the others in the top five are Alibaba, Baidu and Tencent.

Snap Inc. recently filed paperwork for an initial public offering that values its company at more than $20 billion, according to Reuters.

The company only comes in 18th on eMarketer's list of top global digital advertising revenue drivers in 2016, with the firm projecting it will make $370 million. For comparison, it estimates that Google will grab $63.11 billion in digital advertising revenue, while Facebook will bring in $25.94 billion.

EMarketer has projected that global advertising revenue would reach $542.55 billion in 2016, while ZenithOptimedia pegged the figure at a slightly higher $579 billion. During the first half of 2016 in the U.S. alone, brands spent $32.7 billion on digital advertising, according to the Interactive Advertising Bureau.

Companies like Alibaba, Baidu and Tencent will make a considerable amount more than Snap Inc. in ad revenue this year, not to mention that they have a presence in Asian countries like China where Snapchat has yet to have a big user base. Other American companies like Microsoft, Yahoo, Twitter, Verizon and Amazon also get a large portion of digital advertising revenue. Part of Snap's current low ranking is that it is reliant on only mobile ad revenue, whereas its competitors can draw from display, search and mobile ad sales.

EMarketer is predicting that Snap will make $940 million in global ad revenue in 2017. It also projects the company will bring in $1.76 billion in 2018, putting it ahead of Amazon's ad revenue.

"Depending on the marketer you speak to, I think [Snap Inc. is] definitely in the [digital ad] consideration set," John Sampogna, co-CEO at advertising agency Wondersauce. "They're definitely in the conversations we're having with brands on ad spend. Snapchat tends to be more and more popular, and more importantly they understand their user."

Snapchat is especially growing in popularity as an advertising platform in developed ad markets like the U.S. and Canada. It appeals to younger, desirable audiences, and it currently boasts 150 million daily active users.

Its sponsored lenses and filters, which require people to use branded materials in their posts, is a different kind of advertising that has been shown to have high engagement levels, Sampogna said. Snap said the average user plays around with a branded filter for 20 seconds.

In addition, Snap only began to launch its current advertising offerings at Cannes in June 2015. (The company started offering advertising in October 2014, but those types of ads are no longer offered.)

"It's still early days," eMarketer's Boyle said. "The user base has grown so quickly, and they've really introduced a lot of ad units, and improved their targeting since advertisers were critical of that."

One area Snap has been great at is allowing third-party companies to measure ad effectiveness, said Marla Kaplowitz, CEO of media agency MEC North America. Brands have been critical of Facebook recently, given the challenges with its video ads, she said. With the sound off, it makes the video advertising on Facebook more useful at building brand awareness than selling products, Kaplowitz said. However, some companies do aim for gaining name recognition with their digital campaigns over direct sales.

In addition, Facebook admitted in September it had accidentally inflated the amount of time users spent viewing its videos. A view is counted when a user pays attention for just three seconds. Facebook allows advertisers to buy video according to different higher thresholds, for example, cost per thousand views (CPMs) or 10-second views.

"I do think Facebook is under a lot of scrutiny right now because of its measurements and what advertisers are actually getting," Kaplowitz said.