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The word of the day for ad-supported businesses is diversification. Given the headwinds seen in the broader advertising marketplace, several ad-dependent tech players – from Google to The New York Times – are carving out new revenue streams to de-risk their businesses.
Before getting into those dynamics, what are the ad-world headwinds causing all this? It’s a combination of things, and a bit of a domino effect. Generative AI and other procedural automation have displaced ad agencies and replaced owned media with earned media.
These factors have caused ad rates, such as CPMs, to inflate to make up for lost margins. That in turn drives away more advertisers – a vicious cycle. Combine softened demand, higher prices, and a flood of new cost-efficient alternatives, and you have an ad world turned upside down.
That brings us back to diversification moves – which oddly occur in the other direction too, given ad programs from Apple, Amazon, and Netflix. The goal is to both de-risk and maintain revenue growth – a pronounced challenge for tech giants given the law of large numbers.
One company that has navigated these waters is Snap. Its gradual trajectory towards revenue diversification culminated recently with the revelation in its Q4 earnings that subscription revenue, such as Snapchat+, has reached $1 billion in annual recurring revenue (ARR).
Revenue Roundup
So to characterize revenue diversification endeavors underway at Snap – an exemplar in this broader trend – we’ve examined four business units that could cushion revenues and help grow its business in the face of ad-world headwinds. Here they are in order of appearance.
1. Snapchat+
Snapchat+ is the centerpiece of Snap’s subscription business so far. It offers a set of VIP tiers for Snap power users. For example, the $3.99/ month base plan gives users early access to new content, exclusive Bitmoji skins, and other digital perks. And the $5.99 Lens+ add-on (more on that next) extends that exclusive access to premium AR lenses. At the top tier, Snap offers Snapchat+ Platinum for $15.99 per month, which unlocks an additional set of VIP features. Altogether, these offer a combination of exclusive content and an ad-free experience – a value proposition that is now market validated with 25 million users and $1 billion in ARR.
2. Lens+
As noted, Lens+ is an optional add-on for Snapchat+ ($8.99 all-in) that gives users early and exclusive access to a reserved set of premium lenses. In our anecdotal endeavors in Snapchat, we’ve noticed a growing number of high-fidelity lenses in the Lens Carousel, marked as Lens+ exclusives. But importantly, it’s not a density that depletes the quantity of free lenses for non-subscribers. Beyond revenue diversification for Snap, Lens+ is a key moment for the broader AR world. As background, most consumer mobile AR is brand-sponsored rather than user-purchased. The outlier to date in consumer-purchased AR is in-app purchases in Pokémon Go, which has declined from the app’s early popularity. If Snap can demonstrate through Lens+ that users will pay for AR outside of that PGO outlier – in this case, lenses – it will be a key point of validation for consumer AR.
3. Creator Subscriptions
As the latest addition to Snap’s revenue mix, it launched Creator Subscriptions. These provide a formalized structure for users to subscribe to Snapchat creators and receive their exclusive content and updates, such as Snaps and Stories. This can be both a revenue stream for Snap – via revenue share – and a long-term platform-growth play. The latter comes about as the promise of monetization attracts more creators to Snapchat. More creators means more content, which means more user engagement and thus a business case that Snap can present to Madison Avenue. It’s a flywheel that kicks off with attracting creators to the platform, which has been Snap’s playbook from the beginning, especially with Lens Studio.
4. Scaling with Specs
We’ll conclude this list with Snap’s potentially most notable revenue-diversification move of all: Spectacles. The revenue stream for Spectacles’ last two generations wasn’t considerable, but that’s by design, as they were limited to developer-only status. But that will change soon. As you may know, Snap has committed to releasing consumer Spectacles – whose branding will be streamlined to “Specs” – this year. That consumer designation, as well as consumer pricing and design, should expand the device’s addressable market, and therefore revenue. But it’s important to note that the Specs product line is now represented by its own legal entity, Specs Inc. As a separate but fully-owned subsidiary of Snap, Inc., it has capitalization and balance sheet implications, and will carry its own P&L. The latter is where revenue lives, but returns could make their way back to the mother ship in various ways.
Ratchet Up
So there you have it. We’ll watch closely as this list of revenue streams continues to grow. Meanwhile, though we characterized the broader ad market as challenged, Snap’s ad business isn’t in decline. In fact, its latest earnings showed 10 percent year-over-year revenue growth.
Lastly, it’s worth noting that Snap has not only reached $1 billion in ARR for its subscription business, but has done so with a certain velocity. The subscriber count is growing fast, meaning that – unless it hits a ceiling or saturation point soon – we could see it continue to ratchet up.