Snap Inc. Stumbles Amid Growing Competition from Facebook and Apple

Snap Inc. recently posted its first earnings report since its $3 billion IPO, revealing that it sold, at most, 63,800 pairs of Spectacles in the first quarter of this year. Like Apple, Snap doesn’t release exact sales figures for its fledgling wearables business and instead reports it as “other revenue.” But it did admit that much of the $8.3 million it brought in from the category during the first quarter came from Spectacles– a $130 pair of enhanced sunglasses with a built-in camera that records 10-30 second circular video and connects to the Snapchat app. While the reviews have been largely positive, sales have not.

But that hasn’t dimmed the enthusiasm of companies like Facebook and Apple.

You can extrapolate from the price point and revenue figures that Snap sold, at the very most, around 63,800 pairs of Spectacles in Q1 2017 and 34,600 in Q4 2016– fewer than 100,000 pairs since they first launched last November. That’s not exactly a slam dunk, though to be fair, Snap only began selling Spectacles online in mid-February, just a few short weeks before the first quarter ended. Prior to that, you could only grab a pair from bright yellow vending machines at select locations in the US, or from a lone pop-up store in New York City. But it shows that the Spectacles– Snap’s first foray into hardware– aren’t making a dent in terms of revenue growth.

It also bodes ill for the future of the market for tech-enhanced glasses, which has already consigned Google’s Glass to the tech graveyard. But that hasn’t dimmed the enthusiasm of major companies like Facebook and Apple, who see a wealth of opportunity in augmented reality.

Snap’s Facebook Problem

Mark Zuckerberg recently reiterated his firm commitment to the field in the F8 conference, where he laid out elements of his grand vision for AR, which includes one day selling stylish, lightweight AR glasses that can superimpose images onto the real world.

Zuckerberg did add, however, that selling glasses could wait and that Facebook would focus its AR efforts on smartphone cameras in the near-term. And earlier this year, the Financial Times reported that Apple was “stepping up its efforts” to develop its own AR glasses for shipment by 2018, as its next big product after the Apple Watch. They’re expected to be able to display visual content like maps and work in tandem with the upcoming iPhone’s rumored AR features.

But Snap has bigger problems than its Spectacles, with Facebook aggressively copying and integrating Snapchat’s key features into Instagram as well as its own platform. Snap did add another 8 million users in the first three months of this year, bringing its daily active user base up to a total of 166 million and bringing its quarterly growth rate to a mere 5%, up from a dismal 3.2% in Q4. However, that did little to dispel concerns on Wall Street that Facebook and Instagram, which by some estimates have around 400 million daily active users, are stifling Snap’s growth and demonstrating that it can effectively be cloned.

During Snap’s earnings call, CEO Evan Spiegel tried to paint Facebook’s imitation as a form of flattery. “You have to get comfortable with and enjoy the fact that someone is going to copy you if you make great stuff,” Spiegel said. “At the end of the day, just because Yahoo has a search box, it doesn’t mean they’re Google.”

In addition, Snap reported a net loss of around $2.2 billion during the first quarter. Most of those losses could be attributed to costs related to its recent IPO, namely the $800 million bonus Spiegel took home for taking the company public. At the same time, it earned just $149.6 million in revenue in the first quarter. While that’s a significant improvement over the $39 million Snap brought in during the first quarter of last year, it failed to meet Wall Street’s expected revenue target of $158 million. All in all, it wasn’t a good look for the company and its stock tumbled dramatically in the wake of its earnings report.

While some investors and analysts are starting to lose confidence in Snapchat, others see long-term growth potential for the young company.

Suranga Chandratillake, general partner of Balderton Capital, said to City A.M. that “Even though Snap missed on its first call, I think it’s too early to give the doom merchants centre stage. The long-term trend is clear: Snap has demonstrated that brand advertising can work online and, as such, is the first real, existential threat to the huge television advertising market, especially when you consider how little traditional TV younger people are watching, and how much time they are spending on platforms like Snap.”