Snapchat Stories

This morning, I read up on Snapchat’s dismal earnings — their first report as a public company. They lost $2.2 billion, with more than one-third of that amount spent on R&D — a testament to the fact that the company knows that there is no such thing as a technological moat, not with Facebook snapping at its heels, and so is pouring hundreds of millions of dollars into innovation spending to maintain their edge.

Ben Thompson, when Snapchat released its S-1, put it lyrically:

“Most companies use their S-1 to explain how they are building a sustainable competitive advantage — a moat, if you will. Snap is declaring that moats no longer exist; all it has is the Gingerbread Man strategy:

Run, run, run as fast as you can.
You’ll never catch me, I’m the gingerbread man.”

Reading the earnings report, I was reminded of Facebook’s first earnings report almost five years ago (I distinctly remember reading it on a crosstown bus, as it rumbled through Central Park), in July 2012. Facebook then, like Snapchat now, faced substantial headwinds. Just for fun, I’ll put some excerpts below:

During the call with analysts, company executives emphasized their efforts to make Facebook accessible on mobile devices…“The shift towards mobile is incredibly important,” Mr. Zuckerberg said during the call.

The stock was down 14 percent, to slightly under $23 a share, a new low. That comes on top of an 8 percent decline in regular trading on Thursday, even before the earnings announcement, on the chill from weak earnings from the social gaming creator Zynga, a major Facebook partner.

The company’s eye-popping $1 billion acquisition of Instagram earlier this year still hasn’t closed…Mr. Zuckerberg said that while most of the company’s acquisitions were talent-based, Instagram was not, assuaging some fears that the mobile app would be shuttered after its employees relocated to Team Facebook.

Ms. Sandberg congratulated Marissa Mayer on her new role at Yahoo. A few moments later, Ms. Mayer replied in kind via Twitter, saying: “Thanks for the shout out, @sherylsandberg — very excited to be here at @Yahoo!”

Time flies. Yahoo has been sold for parts and patents, and Zynga can hardly be called “a major Facebook partner.” Instagram, on the other hand, is the tip of Facebook’s spear when it comes to doing battle with Snapchat/poking it repeatedly with knockoff features.

The earnings report also points to the obvious differences in the challenges these companies faced at roughly equivalent points in their lives: for Facebook, obstacles were structural and market-oriented: how to capitalize on a global transition to mobile, how to gauge how much advertising users would tolerate, how seemingly unrelated teams would be integrated into Menlo Park. One thing that is missing, however, is mention of competition.

In contrast, basically every news outlet that reported Snapchat’s earnings makes mention of the specter of Facebook within the first paragraph — a demonstration of the social network’s near-monopolistic dominance of the sector. The result of this grip is that Snapchat is forced to invest nearly $1 billion into R&D — a colossal sum for a relatively small company. There is the lurking sense that Facebook will continue to play the malignant Lord Farquaad to Snapchat’s Gingerbread Man.

But if the past few months are any indication, whatever software innovations Snapchat releases — lenses, filters, status messages — will be assiduously replicated by Facebook — first in Instagram, then in Messenger, and, finally, in plodding WhatsApp.

It seems, then, that much of Snapchat’s future lies in producing wacky innovations similar to Spectacles: totally out-of-the-box products that are deeply enmeshed with the platform’s quirks — circular video to Facebook’s square offerings.

Snapchat’s future initiatives do not need be hardware — although (1) hardware is hard to imitate at scale, and (2) attempts to do so ring more falsely, and (3) Facebook doesn’t have much of a successful track record in physical devices. But one hopes for Snap’s sake that the spirit, and development team, that produced Spectacles can keep Facebook from storming their castle long enough to build a wide-enough moat, and preclude further crumbling of Snapchat’s Gingerbread Man.

But yes, Gumdrop Buttons does seem like a good name for a wearable.

Disclosure: I hold shares of Facebook. I don’t love gingerbread cookies.