Snap Inc. said Tuesday that the average cost of its ads dipped by 60% as the Snapchat parent company transitions its ad-buying to a self-serve system that can better compete with Facebook Inc. and Alphabet Inc.
Snap’s discussion of its ad prices, measured in impressions, came along with third-quarter earnings, which came up well short as Snap again reported massive losses and slowing revenue growth. Snap
stock was down 17.2% to $12.52 in after-hours trading, after falling 34% in the past six months into Tuesday’s close, as the S&P 500 index
has gained 8%.
On its conference call Tuesday afternoon, Snap executives said that more than 80% of its ads are delivered via its auction-based ad system, which it launched less than a year ago. As ad prices sunk, Chief Executive Evan Spiegel highlighted the greater quantity the process brings, saying that the company added nearly five times the number of buys from the beginning of the quarter, increasing the number of ads Snap served by 400% from the year-earlier period.
The sharp decline in the cost of Snap ads wasn’t a surprise, Forrester analyst Melissa Parrish told MarketWatch in an interview late Tuesday. In fact, she expected the cost to drop off dramatically because essentially buyers interested in what the industry describes as programmatic advertising are really racing for the cheapest possible inventory.
“The thing is, any time you switch to a self-serve platform with an auction-based environment, the [cost per 1,000 impressions] will always come down,” she said. “Buyers are looking for the cheapest media.”
What was less clear, Parrish said, is how Snap will manage to grow its ad revenue in the future.
There are good reasons why Snap is moving toward automated ad-buying, chief among them that it allows small and medium-size businesses to buy ads that normally would be reserved for ad spends of hundreds of thousands of dollars. Facebook executives on the company’s third-quarter earnings call said that it had attracted millions of sellers, and those smaller ad-spends made up the majority of the company’s ad revenue — the long tail, as it turns out, can be very profitable.
In contrast to Snap, rival Facebook managed to increase average ad prices 35% overall in the third quarter. One factor is the amount of inventory, because as Facebook’s
ad growth slows, the same — or presumably greater — number of advertisers bid for that space, thus driving ad prices up, Facebook Chief Financial Officer David Wehner said on the company’s third-quarter call with analysts.
The other reason is that Facebook is improving its ability to target and optimize ads, Wehner said, helping ad buyers find the best locations in which to spend their dollars. One of the main reasons Facebook is able to keep its ad costs up is that it can more easily demonstrate value to advertisers, Parrish said.
Parrish noted that while overall Facebook ad prices are increasing, executives did say the cost per 1,000 impressions for its programmatic ad sales were dropping, though nowhere near the 60% Snap reported.
“It has years of helping advertisers figure out how to measure ads, it has a larger audience and there is greater confidence in the platform’s ability to deliver,” Parrish said. “Once you believe in the platform, those [ad costs] start to stabilize.”
Whether Snap can capitalize on a similar success remains to be seen, but it must also figure out how to avoid some of the pitfalls that come with automated ad buying. In recent months the tech titans of online advertising have been dogged by reports of clients being able to target ads via offensive criteria, as well as selling ads to Russia-backed entities that aimed to manipulate the 2016 U.S. election.
unit Google, for example, has in the past offered would-be advertisers the ability to target anti-Semitic topics, until the company removed them.