Snap seems to finally be following Facebook and Google's revenue playbook
- Snap scared investors last year when its ad prices plummeted as it shifted to an automated auction-based model.
- But in Q4, Snap may have started to see the volume it needs for its ad auction to work. Pricing went down, but ad space surged and so did revenue.
- That's exactly the Google and Facebook playbook - building a huge ad business by working with thousands of small advertisers.
Snap's automated ad auction may finally be hitting its stride. If Google's and Facebook's experience with this is any indicator, that could unlock massive growth potential.
In an eye-popping surprise of an earnings announcement, Snap easily topped investor expectations for its fourth quarter revenue. The company's growth appears to be driven by a surge in automated, or programmatic, advertising.
During its third quarter, the company panicked the investor world when it looked like it had been caught flat footed as it shifted from selling ad deals directly to big-budget marketers to using automated software. Snap's ad prices plunged "dramatically," said founder and CEO Evan Spiegel at the time.
During the fourth quarter, its ad prices slid again: Snap's price per ad impression slid by 25%.
But the difference this time around was that Snap's ad volume increased by more than 4x year over year. In other words, even though prices were down, Snap had way more ads to sell.
The net result is that advertising revenue grew by 38% versus third quarter, which would imply that Snap's auction had a lot more buyers. In fact, chief strategy officer Imran Khan said that compared to third quarter, the number of ad buyers using Snap's auction doubled.
Plus, Snap said 90% of its ads were purchased programmatically in the quarter, "which means that the auction transition for Snap Ads is largely behind us," Spiegel wrote in prepared remarks.
Khan also called out Snap's success in transitioning from a focus on large marketers to small advertisers. Revenue from small and medium-sized businesses more than doubled versus the third quarter, he said, and the company made the majority of its money from advertisers outside of the Ad Age Top 100 brands list.
If that trend continues, things could be looking up for Snap. Because that's exactly the Facebook and Google playbook.
Yes, both digital giants cater to giant advertisers like General Motors and Coke - the kind of brands that have long spent big on TV ads. Snap started its ad business talking about its reach and user-dynamic by comparing itself to TV.
But Facebook and Google's magic lies in racking up ad spending from millions of small advertisers that buy using their respective automated platforms - without ever having to talk to a sales person.
That's the kind of ad business - to put it in Silicon Valley terms - that really scales.