Snapchat’s Future in AR

Augmented Reality (AR) has received significant publicity over the last few months due to Apple and Meta’s sizable investments in the industry (Meta’s AR / VR Roadmap, Apple Vision Pro). These sizable investments have reinvigorated the excitement around both Augmented Reality and Virtual Reality, which have had a plethora of false starts (and slow progress) over the past decade. However, the recent inertia around AR/VR is merited as we believe that the industry is on the cusp of altering the way many humans interact with the physical world. 

Today, we will focus on Snapchat, who was once an early innovator in AR, yet now the company is facing questions about its position in the future of this rapidly evolving technology. In September 2015, four years after it was founded, Snapchat introduced its pioneering AR product: Lenses. This product allowed users to add captivating filters to their videos and photos and is often credited as the primary catalyst for Snapchat’s explosive growth. The quarter before releasing its first AR-enabled product feature, Snapchat had 86m DAUs (Statista) yet today the company has surged to almost 400m DAUs. Since the release of its AR product features, Snapchat has been actively developing more tools in an effort to attract developers to its platform.

A year after their AR release in 2015, later, in November of 2016, Snapchat unveiled Spectacles, which were smart glasses dedicated to recording video exclusively for Snapchat. They sold 150k units over the first two years (Techcrunch) and have generally been a loss leader for Snapchat (Gizmodo). Since then, Snapchat has launched two new versions (most recently in 2019), with Spectacles 4.0 being announced in 2021 (Gizmodo), and expanded the offering to make Spectacles  a platform-agnostic capture device.  

Snapchat has also been struggling due to its business model being heavily reliant on advertising. This past quarter, Snap, the parent company of Snapchat, reported its second straight decline in quarterly sales. They posted $1.07b in Q2 which was down 4% from a year earlier and its sixth consecutive quarter loss with a net loss of $377m (NY Times). Snap’s cash on hand for the quarter ending June 30, 2023 was ~$3.7B, a 24.28% decline year-over-year. In short, they burn a lot of cash each quarter (they just burned through $1.5b in cash in the LTM) but they do have enough buffer to find profitability at some point over the next 8-12 quarters (assuming no large M&A initiatives). 

Snapchat’s Initiatives

Over the years Snapchat has been heavily investing in and acquiring tools for developers and consumers. Here are a few examples of their initiatives:

• Creator Marketplace: allows brands to search and partner with Snap’s top Lens Creators at scale
• Lens Cloud: powers a new class of AR experiences that are more dynamic and interactive 
• ARES: AR solutions for business. Built to drive personalization at scale, boost engagement, and increase bottom-line performance through immersive experiences
• Snappables: AR game played using the filters functionality in-app
• Th3RD (acquisition): 3D scan studio to create digital 3D counterparts or people and products
• Forma (acquisition): provides software to create photo-realistic digital avatars from regular photos
• Vertebrae (acquisition): enables brands to reach consumers through interactive and immersive virtual reality advertising
• WaveOptics (acquisition): delivers optical engines for augmented reality eyewear
• ARIEL AI (acquisition): enables a world of seamless augmented reality 
• AI Factory (acquisition): building augmented reality-powered messaging
• CIMAGINE (acquisition): AR technology startup that enables consumers to use their mobile and wearable devices to visualize products
• Epiphany Eyewear (acquisition): produces fashion forward eyewear equipment embedded with HD video cameras

Snapchat has struggled to shed its identity as merely a messaging and media-sharing platform, even though they have acquired over 300,000 Lens creators and have focused heavily on AR-driven ecommerce. This approach has resulted in increased branded content, particularly AR-enabled filters. However, it has not solidified Snapchat's status as a dominant AR company.

Why is Snapchat Losing the AR Race?

Snapchat was initially launched as a messaging platform where users could share time-limited photos as a form of communication. The format started as photo sharing only but after a year, allowed users to send 10 second videos. In 2012, 50 million snaps were being sent every day (The Street). 

We believe Snapchat has not been able to be a dominant AR player because Snap has always viewed AR technology as a tack-on feature to their core messaging platform instead of making AR content and distribution one of its core focuses.  

Snapchat’s prioritized AR features surrounded individual expression; however, these features failed to give the users the bridge from the physical and digital worlds unlike how Pokémon Go leveraged AR to give users the ability to feel like a Pokémon trainer. 

The greatest misstep for Snapchat’s AR efforts was a lack of investment and innovation around AR games. While they did launch Snappables in 2018 (30m MAUs as of May 2021), this was two years after Pokémon GO was released and allowed Niantic to supplant itself as the dominant AR games developer in the world. This lack of prioritization also caused them to lack the tools and infrastructure third party developers were looking for to release content on the platform. 

When Pokémon Go was released, Snapchat had over 100m DAUs that were already interacting with the platform through the camera. They had a great foundation to start experimenting with completely new gameplay that could have leveraged the social graphs and relationships of its users. 

Where Could Snapchat Go Next

• At home hardware: Due to not having any compelling hardware, Snapchat will struggle to keep users in a larger AR-focused ecosystem. Where they have succeeded is in branded content (99% of revenue comes from advertising). As of today, 250m Snapchat users engage with AR per day and AR Lenses are used 6b+ times per day. This is validation that Lenses are a popular feature and could allow for more ecommerce to be done through a piece of Snapchat hardware.
• Ecommerce ecosystems: Offering a more robust ecommerce experience for brands, content creators, and consumers could create a powerful ecosystem for recommending products like clothing, makeup, and furniture. 

Takeaway: Snapchat has struggled to become a significant player in AR (outside of Lenses) and missed a serious opportunity within gaming. For Snapchat to find its footing in AR, ecommerce may offer the best avenue as they have the users and tools to build out an AR-enabled ecommerce solution that would be a seamless transition for the platform and its users.