Social Media

Here are challenges Snapchat faces as it gets closer to its IPO

Snapchat preps for IPO: What investors should be watching

Snap's potential appeal to digital advertisers is one of the main reasons it has a $25 billion valuation right as it approaches its IPO.

But while its unique mobile-first platform is a new way to reach the youth at scale, there are some questions that need to be answered before it becomes a Google or Facebook, ad agencies say.

Here's some challenges agencies say Snapchat will face going forward.

It has the youth audience for now, but what does that mean for the future?

Snapchat says it has 150 million daily active users, with the majority in the 18- to 24-year-old range. Its private nature lets users send videos to each other without sharing them publicly, which some believe will keep kids happy. But as mom and dad get interested in finding out more about the platform, there are concerns it could lose its cool factor.

"Becoming an advertising powerhouse may boil down to how well they manage relevance to their younger user base, with appeal to advertisers based on scale," said Todd Alchin, chief creative strategist at creative media agency Noble People.

In addition, as Snapchat attracts more advertisers, it will have to walk a delicate balance between keeping users happy while including more ads — a question Facebook is finding itself have to answer from investors.

"There is a natural evolution with every platform where they go from purely a hot cultural phenomenon and transform into a real functioning business," said Mike Dossett, manager of digital strategy at agency RPA. "They need to balance maintaining some of the magic of the platform."

Then, there's the challenge of expanding the audience to include older millennials and up. To do so, they'll have to draw users from other social media platforms. It's a hard task, especially with many older users of social media using Facebook as their portal to both world news and their friends, said Mike Lobikis, head of sales for integrated production company Tool of North America.

"Facebook has done a better job in investing in people's attention," Lobikis said. "It's the place where people spend their most time."

It's hard to prove return on investment

Snapchat's style of advertising is best for promoting brand awareness, agencies say. That can be useful for large companies with big ad budgets, but medium to small companies want to see ads leading directly to sales, one agency source said. And Snapchat ads don't come cheap: One agency source said campaigns run between six and seven figures, and another said a sponsored lens can run between $350,000 to $700,000 a day. (However, there are some kinds of ads you can purchase for under $50,000.)

Another issue: The nature of Snapchat lenses — their most distinct ad offering — forces brands to surrender control over their advertising message to users. "It's not your traditional advertising push messaging," Rob Griffin, chief innovation officer of digital agency Almighty

Snapchat has been trying to address that by adding more measurement capabilities. Since it launched its advertising business in 2016, it now offers third-party verification from companies like Oracle Data Cloud, Nielsen mobile Digital Ad Ratings and Google DoubleClick. It's also adding ways to link to content outside of its platform, which could lead to additional e-commerce opportunities.

Still despite the improvements, agencies say currently it's still less accountable than Google or Facebook for now.

"From a targeting perspective, it's not as robust," said Zack Green, communications planner at agency BBH NY.

It doesn't have much exclusive content

Snapchat hasn't built a reputation as a place to watch video, like YouTube or Facebook. Longer viewing times lead to more time on platform, which makes advertisers more likely to want to buy ads. But some advertisers are skeptical that Snapchat's users would want to watch content past the two-minute mark.

However, the company is bolstering original content through deals with networks ABC and NBC, as well as with leagues like the NBA. Shows like "Watch Party: The Bachelor" and "The Voice on Snapchat" are exclusive to the platform. In addition, live stories — which curate content from users — are also only found on the platform.

"What they're doing is pivoting into a more traditional platform for content," Lobikis said.

It involves extra work to create ads

Since Snapchat ads consist of vertical video or platform-specific filters, it often requires agencies to make ads specifically for it — which costs extra money.

"Everything is completely custom," RPA's Dossett said. "Their standard video inventory requires new production because it's vertical, and there's a 10-second limitation. That makes it challenging to plug and play."

Plus, it's a different kind of advertising. People search for content on Facebook and Twitter, making it easy for people to share branded posts with their friends to help the ads reach more people. Snapchat doesn't really let people share things they find online, and you can't post Snapchat content on other platforms.

To be fair, the most successful digital ads have to be custom made for the social platform. In addition, Snap bought advertising technology Flite — according to sources with knowledge of the deal — a company that allows brands to adapt ads to multiple platforms. RPA's Dossett is hopeful this will lead to quicker ways to create custom ads for specific target audiences.

"If you read between the lines, [Flite] is an ad tech partner that made their bones scaling and creating ads," Dossett said. "Now they're joining a company that has in the past had challenges scaling creative."

Disclosure: NBCUniversal is the parent company of NBC and CNBC.

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