As Snapchat (SNAP) nears its IPO, analysts have been pouring over its public documents. Ben Thompson found this interesting bit:
Our strategy is to invest in product innovation and take risks to improve our camera platform. We do this in an effort to drive user engagement, which we can then monetize through advertising. We use the revenue we generate to fund future product innovation to grow our business.
In a world where anyone can distribute products instantly and provide them for free, the best way to compete is by innovating to create the most engaging products. That’s because it’s difficult to use distribution or cost as a competitive advantage — new software is available to users immediately, and for free. We believe this means that our industry favors companies that innovate, because people will use their products.
We invest heavily in future product innovation and take risks to try to improve our camera platform and drive long-term user engagement. Sometimes this means sacrificing short-term engagement to introduce products, like Stories, that might change the way people use Snapchat. Additionally, our products often use new technologies and require people to change their behavior, such as using a camera to talk with their friends. This means that our products take a lot of time and money to develop, and might have slow adoption rates. While not all of our investments will pay off in the long run, we are willing to take these risks in an attempt to create the best and most differentiated products in the market.
Snapchat’s strategy is not to try and build a level of control that will insulate it from future competition. Instead, it is focussed on execution where it tries to continually “get ahead and stay ahead.” Thompson calls this the Gingerbread Man strategy after the famous nursery rhyme.
I have written about the distinction between execution and control before (complete with pictures). As it happened, today, my first academic paper on this topic (co-authored with Scott Stern of MIT), was released by the NBER today. A shorter version is coming out in the American Economic Review Papers and Proceedings in May. The paper shows that an execution strategy can, under certain circumstances, be more profitable than a control strategy. This is in contrast to the usual supposition that control is superior to execution — after all, aren’t barriers to entry better whenever you can get them?
The answer is not quite. It costs money to build walls — especially for entrepreneurs. Moreover, the money must be spent early in the piece. By contrast, with execution, you can get to market more quickly and also run experiments that can save you from costly mistakes. Ask Segway what it is like to take your time, build a big plant and launch prior to any market validation.
Thompson notes that Snapchat is taking a play out of the Apple book. I agree. I have always thought of Apple as a company that generally competes on the merits and has few entry barriers. Wall Street has apparently also thought that and continued to discount Apple stock relative to its earnings. Why? Because barriers to entry are things it can point to while innovative capabilites based only on a track record are less tangible. Thompson suggests Snapchat may face a little of that Apple medicine.
One issue that makes it hard to evaluate a start-up as opposed to Apple is, of course, the track record issue. Snapchat may be pursuing execution but they haven’t quickly executed on profitability. Anyone can say they are executing but actually doing it is another matter. Snapchat hasn’t proven itself out yet. It also is popular amongst teenagers which for me is not a good but a bad thing. Nonetheless, the overall strategy of Snapchat, at least, does have economic validity.
Originally published on Wordpress
