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Global Economy

Snapchat business model in crisis?

Photo app Snapchat's business has been hit hard by weakness in the online advertising market. The otherwise rapid sales growth fell in the past quarter to a meager plus of 13 percent to 1.11 billion dollars. That's the slowest growth since Snapchat operator Snap went public just over five years ago.

In the first quarter, the growth rate was 38 percent, before that 50 or 60 percent were also common. The quarterly loss widened from just under $152 million a year earlier to a good $422 million. Snap has never posted an annual profit.

Business model in crisis?

The turbulence was triggered by high inflation and the weak economy. This situation allows many companies to save on advertising expenses. Advertising and the associated business with user data is the main source of income for Snapchat, but also for other technology groups.

That's why the weak Snapchat numbers are causing excitement: Investors are wondering whether companies like Facebook and Google are also affected by the weakness. Both attract a large chunk of online ad spend, but Facebook in particular has faced competition from video app Tiktok in the past.

According to Statista, the digital advertising market is expected to be worth around $550 billion this year. Experts estimate that the big two players in the online advertising market, together with Amazon, account for more than 60 percent of the global digital advertising budget.

Privacy is bad for business

In addition, Snapchat is still struggling with Apple's measures to better protect privacy on the iPhone. App operators must explicitly ask users for permission if they want to track their behavior across different applications.

Many users rejected this, which torpedoed numerous business models in online advertising. Snapchat is therefore less able to report advertisers on the success rate of their ads – while the company generally welcomed Apple's measures.

A positive factor for Snapchat is that the number of daily active users increased from 332 to 347 million within three months. They also spent more time on the platform, management points out.

Stock market value is shrinking

Investors are horrified by the current business figures: the share fell 26.79 percent in after-hours trading in the US, just below the twelve dollar mark. It started the year at more than $46.

The stock market value of the company, which was also one of the big winners of the corona pandemic, has been falling dramatically for months: as recently as September last year, the market capitalization was over 130 billion dollars – that's more than twice as much as the current stock market value of Mercedes -Benz. Snapchat's value has since shrunk to around $27 billion.

Expanded reality

Snapchat was originally known for the ability to post photos that disappear on their own. In the meantime, however, the company is relying on the combination of digital effects with the real world on a large scale. This can be gimmicks like virtual masks in a video, or the opportunity to "try on" fashion and cosmetics on the mobile phone display. In the long term, Snap sees the greatest growth opportunities in this so-called augmented reality (AR), stressed top manager Jeremi Gorman.

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