Snapchat: Does drop in users spell trouble?

Snapchat's Evan Spiegel predicts earnings will rise despite a fall-off in its most active users

Snapchat is often name-dropped as being the must-have app for Millennials and their younger Generation Z cohorts, but new figures are causing concern that it could already have peaked.

For the first time, its parent Snap reported that the number of people using the service on a daily basis had dropped.

Over the April-to-June period it said it attracted 188 million daily active users (DAU), which is three million fewer than over the previous quarter.

There has been plenty of chatter in the past about whether the app's appeal could prove as ephemeral as its content.

Reality TV star and entrepreneur Kylie Jenner sent shockwaves in Snap's direction when she suggested she had quit the platform - only to return to it shortly after.

Kylie Jenner worried shareholders when it seemed she was ditching the app

The model Chrissy Teigen also attracted attention a month later when she quit on a more permanent basis, citing problems with Snapchat's redesign.

But until now, the app's popularity still seemed to be in the ascendancy.

"I think it's really dangerous," commented Rob Kniaz, co-founder of the technology venture capital firm Hoxton Ventures.

"When you look at the numbers, if you've lost three million of your most active users by definition, it tells you something is materially wrong with the product and maybe the company."

Snap's shares fell more than 8% after the New York markets opened. They closed the day 6.8% down.

Does Snapchat think this is just a blip?

During a conference call, chief executive Evan Spiegel declared he was "excited" and "optimistic" about the future.

But despite acknowledging the daily-active metric was one he focused on, he declined to say whether user numbers were bouncing back in the current period.

In fact, his new chief financial officer seemed to hint otherwise.

"While we are not going to give DAU guidance, as a reminder, historically, Q3 DAU growth rates have trended down," Tim Stone said.

The two men instead sought to highlight two other trends:

• the number of people using the app at least once a month has grown

• Snapchat is getting better at holding on to new members over the age of 35

So, how do they explain the fall?

There's no shirking it: Snapchat's revamp sparked a backlash, or "disruption" as Mr Spiegel described it.

About six months ago, the app separated out Stories - self-destructing videos and photos - posted by members' friends from those uploaded by celebrities, brands and other professional publishers.

Snap suggests that keeping friends' posts separate from others' has helped it avoid "fake news" becoming a big problem

Users complained that the new design was confusing, in part because friends' Stories were subsequently mixed together with conversational posts. There were also protests about the redesigned user interface and the greater prominence given to sponsored content.

Snap has since made changes to address some of the objections and says it believes it has now "addressed the biggest frustrations".

"I think one of the most important things about the redesign is that we're surfacing the right content to the right people as quickly as possible," Mr Spiegel added.

Another issue is that development of the Android version of Snapchat has lagged behind that of its iPhone equivalent.

Members have complained of poor performance, crashes and image quality issues.

A rewrite of Snapchat's Android app should mean it opens more quickly and offers a smoother experience

To address this, Snap is currently engaged in a major overhaul of its Android code and says it is currently testing the rewrite with a group of users.

But Instagram still poses a threat doesn't it?

Facebook's image-centric app is often seen as Snapchat's biggest rival for eyeballs and advertisers' cash.

In June, it announced its Stories feature alone was being used by 400 million people on a daily basis.

Instagram also recently gained a range of augmented reality effects - which superimpose graphics over people's faces and other real-world objects.

And the recent launch of IGTV - Instagram's vertical video facility, which allows clips to run up to an hour and has its own standalone app - gives users further reason to give their time to the platform.

Instagram Stories are now more popular than Snapchat's, which pioneered the feature

Stories, augmented reality and vertical video are all features that Snapchat adopted first.

But there is one feature Instagram has not copied, which may be working in its favour: Snapstreaks.

The facility counts how many consecutive days a user communicates with a friend, and has previously been seen as an incentive to keep members chatting.

But in June, BusinessInsider interviewed just over 100 US teens, and reported that many now felt Snapstreaks to be a "social pressure" turn-off.

So why are sales up?

A switch-over to programmatic advertising - in which ads are bought via automated software tools rather than human sales agents - seems to be going well and has help Snap attract more brands.

In addition, it is getting better at matching the promotions to consumers.

"Advertisers can currently leverage over thousand different segments for targeting with thousands more coming," Snapchat's chief strategy officer Imran Khan told analysts.

"One good example is advertisers can target their Snapchat campaign to people who purchased lipstick at a retail store."

Of course, as Snap gets better at this, it runs the risk of creeping out its members.

Furthermore, users are likely to be less enthused than shareholders by an assertion that executives are "looking at monetising all aspects" of the app.