Nov 8, 2017 ยท 8 minutes

My first reaction to the news that Snap suffered a four-hour long outage Tuesday was: Okay, but this is the Internet, where bad things can happen.

Then I wondered whether it was just a cosmic coincidence that the outage happened only hours before the company was scheduled to report its third-ever earnings. After all, the first two times didn't go so well. Snap fell as much as 25% following its first earnings report. The next time around, it dropped as much as 17%.

Sure enough, following its latest earnings report, Snap's stock suffered another financial outage, so to speak. Snap shares dropped as much as 21% after it said that revenue and daily active users were both below what analysts had forecast, while its net loss was larger than expected.

Snap has its explanations for all the missed targets. A shift to programmatic ads was dragging down revenue because ad rates dropped before the volume of new advertisers could make up the loss. Meanwhile, annual user growth has slowed to a Twitter-like pace, falling to 17% last quarter from 36% in the first quarter. To fix this, Snap is redesigning its Snapchat app. Which means more spending on things like R&D.

How much more spending? In the first nine months of 2017, Snap has spent $1.3 billion on engineering talent and product development. That's eleven times as much as it spent on R&D during the same period in 2016 and two and a half times what it saw in revenue. One way of looking at this spend is: For every dollar of revenue Snap is taking from that same-old app this year, it's spending $2.40 on a brand-new app replacing it.

By that measure, the redesigned Snapchat had better be pretty good. In his prepared comment to shareholders, CEO Evan Spiegel wouldn't give too much information on the redesign – he wouldn't even say when it's coming – only that the new app would “make it easier to use” and “easier to discover the vast quantity of content on our platform that goes undiscovered or unseen every day.”

Oh, and also this,

"There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term. And we don’t yet know how the behavior of our community will change when they begin to use our updated application.”

If at this point you're reminded of Twitter under Jack Dorsey and Yahoo under Marissa Mayer, you're not alone. All three companies saw user growth slow. All three struggled to monetize that user base in a way to make its operations profitable. All three saw their valuations suffer as a result. And all repented for past strategic mistakes while vowing bold moves to remake their product.

There are two things that have so far distinguished Snap from the other two companies. First, unlike Yahoo and Twitter, Snap never caved in to the ill-advised tactic of out-Borging the Borg – that is, competing against Facebook by becoming more like Facebook.

That, however, seems to be changing. Only nine months ago, Spiegel declared in Snap's prospectus that “Snap Inc. is a camera company” and that “Snapchat is a camera application.” Now, he says, Snap is moving “from a one-off event-based product to an always-on content experience.” That is from the camera shooting, and sharing, perishable pics to an always-on stream of content like... well, like a social media news feed.

Responding to an analyst's question, Spiegel defended this transition by explaining it would be a more evolved content feed than what Facebook or Twitter had. “We've been spending a lot of our time sort of studying the evolution of content feeds on mobile,” Spiegel said. According to Spiegel's Theory of Content Evolution, first came Twitter's feed based on “things you were interested in or news organization or celebrities” (which overlooks the early, golden days of the Twitter community, but nevermind), then Facebook's “friend-based feed.” Which Snap aims to evolve from and, Darwin willing, shove down the food ladder.

"I think there is a really exciting opportunity here for another evolution about that content feed that addresses some of the shortcomings of the friend-based content feed model. So, for example, on a friend-based content feed, in order to get more content in that feed you need more friends. And when people start adding more friends, they then seem a lot less comfortable posting content. And so they start posting less. And that means that you need even more friends to get more content. And so you end up in this kind of precarious situation where, because you based the content feed on what friends are posting, you are sort of inherently limited in how you grow that collection of content.

This sounds more like a Ponzi scheme than a social network, which may be Spiegel's point. But it doesn't ring true, especially at a time when the world seems to be burning out on social networks because of their pernicious influence. Here are two reasons why a camera company shouldn't pivot to content. First, GoPro. Second, news feeds have become the torture garden of trolls. Why expose your users, who came to you because of the extreme lengths you took to keep their conversations somewhat pure, to that kind of poison?

Nevermind, Snap claims to have a better way of shoveling content into the attention stream of its users. “The best predictor of what people are interested in and want to watch is actually what they are watching,” Spiegel said, explaining Snap's new feed differentiator, which sounds like ad-targeting circa 2005. but okay.

Look, this is Snap. I've never bought the line that it's a camera company, but if any company has changed how we use mobile cameras, it's Snap. And no company in the past few years has had a greater influence on our non-verbal communications with each other than Snap. I'm looking forward to this redesign, even as I wonder how it will ultimately be paid for. My question is less can Snap pull it off? than can Snap ever make it pay?

Maybe, after Facebook stole so many ideas from Snapchat to build its inferior knockoffs, Snap's sweet revenge will be to build a better Facebook feed. If I'm hearing him right, that's what Spiegel is aiming for, and I wish him all success in this effort. Back whe  the tech world was small enough to fit inside the actual Silicon Valley, back when the markets involved – and therefore the stakes – were much smaller, a company would sometimes put everything on the line to right itself and sail on to glory.

Snap's redesign is intriguing because it has the feel of one of those early-era Silicon Valley all-or-nothing bets. The one thing Snap has going for it is the deepening engagement of its current active users. Snaps per user have risen from 16 per day six months ago to 20 per day now. Snap says other metrics showing deeper engagement, such as time spent on the app, have also increased, although it won't disclose the actual metrics.

Spiegel says he's confident the redesign will reach out to new users while “preserving the frequency and intimacy of communication between close friends.” Whether you use Snap daily or not, Spiegel's phrase should carry some resonance. Depending on how radical this new Snapchat is, Snap is now putting at risk its signature achievement as a company, the very one Facebook has always aspired to. Was this Facebook's dastardly plan all along? Ape Snap so hard it must emulate Facebook back? And in doing so, give up the very thing that made Snap worthwhile?

This gets at the other thing that distinguishes Snap from Yahoo and Twitter. Spiegel's commentary admitted multiple mistakes. Snapchat is “difficult to understand or hard to use.” “Content on our platform goes undiscovered or unseen every day.” Snap “neglected the creator community” while others like YouTube embraced it. With Android beating iOS on usage, Snap will “attract more Android users... we wish we had done this sooner.”

Mayer and Dorsey made such mea culpas in order to throw their preceding CEOs under the bus of Wall Street expectations. Spiegel, a founder who has long played his instincts, has no scapegoat but himself, and so he blamed his past decisions. For Spiegel, this may be one of those individuating moment of maturity. Less self-flagellation than learning a lesson and then moving on. For Snap, it could be the same. Or it could be a powerful, confident step off a precipice.

One analyst on the earnings call probed at this possibility by reminding Spiegel that Snap has been public for nine months, so why the sudden shift in strategy? Spiegel responded by citing Snap's constant evolution. “I guess we're just not afraid to make changes in the long-term interest of the business.”

But it was only a matter of seconds later that Spiegel answered a separate question about the $40 million writedown Snap took on Spectacles, a wearable camera released in the weeks before Snap's IPO that, wrongly, amped up the offering's hype. “You're right,” Spiegel said. “We were very excited and we made the wrong decision... So learning from that we plan to avoiding it in the future.”

So much learning for a public company. And another mea-culpa from Spiegel & Co. Which, again, I applaud, but it makes you wonder how many mistakes a money-losing company can make in the name of innovation before you question their next, bold move. Snap's track record of risk-taking has not exactly panned out, as Spiegel's comments and Snap's stock price confirm.

Now Snap is taking what may be its biggest risk in its seven-year history. Maybe Spiegel's theory of evolution is right. But given the risks ahead, and the losses to date, it seems like there's so much that can go wrong for Snap before everything it's planning goes right. Sure, Snap may pull this off, but once again I'm left thinking: Okay, but this is the Internet, where bad things can happen.