Michael Wade, director of the Global Center for Digital Business Transformation and professor of Innovation and Strategy at IMD, explains.
Shortly after Snap’s (snap) recent IPO, I warned about the uphill battle it would face to generate revenue along with its vulnerability to imitation. On Wednesday, the company released its first post-IPO earnings report. It didn’ t go well. Growth in daily users and revenues both missed expectations, and the stock was down more than 20% in after-hours trading. There are few indications that the future will bring better news, since Snapchat’s main problem is differentiation, and that is not likely to change.
In its early days, Snapchat was refreshingly simple and fun—a picture-messaging platform for friends to stay in touch with other friends, and an energizing change from dated and preachy Facebook (fb) and impersonal Instagram. It soon added playful elements like lenses and filters, which increased its allure.
However, ever since its acquisition attempt was spurned in 2013, Facebook has been on a mission to imitate Snapchat’s best features, mainly through its Instagram brand. Indeed, the company’s CEO, Kevin Systrom, openly admitted that Instagram Stories was a carbon copy of Snapchat Stories, with the sole purpose of converting users to Instagram. It seems to be working.
And it doesn’ t stop with Stories. Snapchat and Instagram are steadily converging. Snapchat has added direct messaging and calling between users, as well as group functions. Instagram has added image and video filters, launched mobile web sharing, and added live video. Facebook is also extending Snapchat-like features to its other brands, like Messenger Day, WhatsApp Status, and Facebook Stories.
Users are reacting. Snapchat’s user growth over the last four quarters has been 17.2%, 7%, 3.2%, and 5%—not exactly explosive. Instagram, by contrast, seems to be faring better, with monthly active users topping 700 million in the most recent quarter, which has doubled in two years.
Snapchat’s differentiation challenge is not unique. It is a key issue among Internet companies in Silicon Valley. It’s tough to build a successful, unique business, but even tougher to sustain it. Have you visited LinkedIn lately? It looks a lot like Facebook. How different really are WhatsApp, Facebook Messenger, Apple (aapl) Facetime, and Skype? If one doesn’ t work, we just skip to the next one and hardly notice a difference.
After a few rounds of imitation, everything starts to look the same. Differentiation disappears, and that is a killer, especially for services without massive scale. Snap needs to erect clear points of differentiation protected by barriers. If it fails to do so, Facebook, with its strong brands and deep pockets, will cherry-pick all of its best ideas.
Where can Snap look for inspiration? China.
Ironically, Chinese Internet companies have the opposite problem to Silicon Valley. They are bad at creating breakthrough ideas, but masterful at incrementally innovating to the point of differentiation. Just look at WeChat. It began as a direct copy of WhatsApp, even down to the green logo. WeChat’s predecessor, QQ, was a direct copy of ICQ, so imitation runs deep in the veins of its parent company, Tencent.
While they may not be great at breakthrough ideas, Tencent, and other Chinese Internet giants, are excellent at post-imitation differentiation. If you look at WeChat today, it is completely different from WhatsApp. Sure, it still has messaging capabilities, but it’s also used for gaming, e-commerce, banking, and many other things. WeChat now has more monthly active users than Instagram, and that’s only in China! The average WeChat user checks the service more than 10 times per day and spends about an hour per day on the app.
When it comes to breakthrough innovations, China can learn a lot from Silicon Valley, but when it comes to sustaining innovations, the reverse is true. I once heard Alibaba’s (baba) chairman Jack Ma say that thousands of incremental changes can add up to breakthrough change. Snap needs to take this lesson to heart. It will need to constantly innovate to maintain its differentiation among users, and it must take all the steps it can to protect its current unique features. Its acquisition of Bitmoji, a personalized emoji feature, is a step in the right direction, but it will need many more actions like this to win the differentiation battle against Facebook and others.
Michael Wade is director of the Global Center for Digital Business Transformation and professor of Innovation and Strategy at IMD. He is also co-author of the book, Digital Vortex: How Today’s Market Leaders Can Beat Disruptive Competitors at Their Own Game.
