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China’s Tencent bought 12 percent of Snap — and everything else we learned from Snap’s earnings report

It’s been a busy week for Snap. And it’s not over yet.

Snap CEO Evan Spiegel onstage
Spiegel at the 2015 Code Conference
Recode / Asa Mathat

It’s been a very busy week for Snap. And it’s only Wednesday.

The media and messaging startup reported earnings on Tuesday, and we learned that Snap’s business is underwhelming and its user growth is suddenly a concern. That combo sent Snap’s stock down more than 18 percent in early after-hours trading, and Snap stock is still down around 16 percent midday on Wednesday.

That wasn’t the only significant news from Snap on Tuesday, though. We have since learned a lot of other things about the company, including the fact that Snap now has a new big-time investor.

Here’s what we’ve gathered over the past 24 hours:

  • Tencent Holdings, the Chinese investment company that owns the popular messaging app WeChat, has purchased more than 12 percent of all Snap shares, according to a Securities and Exchange Commission filing. Tencent only alerted Snap that it was making the purchase after the fact, the filing claims, and because the shares available to public investors do not carry voting power, Tencent did not legally have to disclose its purchase.

    That’s important to note — if Tencent isn’t getting any voting power to go along with its investment, perhaps it simply sees Snapchat as undervalued. It’s also possible the two companies could collaborate.

    “We have long been inspired by the creativity and entrepreneurial spirit of Tencent and we are grateful to continue our longstanding and productive relationship that began over four years ago,” Snap’s 10-Q filing reads.

    “For its part, Martin Lau, Tencent's president, informed us that Tencent is excited to deepen its shareholding relationship with us, and that it looks forward to sharing ideas and experiences.” What that means is still unclear, but Tencent is making a big bet. The 145 million shares it acquired would have been worth well over $2 billion before yesterday’s disappointing earnings.
  • Snap is losing one of its key executives: VP of Engineering Tim Sehn, who joined the company four years ago from Amazon. Sehn’s departure is significant, not just because he held an important role, but because he was one of Snap CEO Evan Spiegel’s closest confidants internally. Spiegel can be difficult to work for, and Sehn was one of the few executives who had Spiegel’s ear, according to multiple sources. Earlier this year, Snap’s General Counsel, Chris Handman, another one of Spiegel’s confidants, also left the company. Sehn’s departure was also listed in Snap’s 10-Q filing, and was first reported by The Information.
  • Snap has finally admitted that its app may be too hard to use, which may be one of the reasons Snap’s user growth hasn’t been as positive as many once expected. Spiegel has promised that an app redesign is coming, and it sounds like that will include more personalization inside the app meant to prioritize certain posts and videos so they’re easier for people to find.

Again, this is significant, primarily because Spiegel has historically built Snapchat using his product and design instincts, not necessarily behavioral data. He was of the mindset that people would either get Snapchat or they wouldn’t, and it wasn’t on the company to try and simplify things for its user base. That mindset has likely contributed to Snap’s young user base — Snap is hard for parents to understand, the thinking goes — but has obviously changed. It will be interesting to see what Snap comes up with. Spiegel declined on Tuesday to share a date for launching the redesign.
Snap’s bet on video-recording sunglasses, called Spectacles, was fun but not very good business. Snapchat added a one-time, $40 million expense to its balance sheet last quarter because of “excess inventory and purchase commitment cancellations” for the glasses. In other words, Snap thought it had $40 million worth of glasses, but has decided they aren’t worth anything. Spiegel didn’t sugarcoat the misstep on the call. “Ultimately we made the wrong decision,” Spiegel admitted. “We’re learning from it.”

  • Snap wants to encourage more creators — the internet celebrities who amass huge followings online on other platforms like Instagram and YouTube — to use Snap, and wants to be sure they make money doing it. “We have historically neglected the creator community on Snapchat that creates and distributes public Stories for the broader Snapchat audience,” Snap CEO Evan Spiegel wrote in prepared earnings remarks. “In 2018, we are going to build more distribution and monetization opportunities for these creators in an effort to empower our creative community to express themselves to a larger audience and build a business with their creativity.”

That could be as simple as a revenue share for ads sold alongside content made by creators, or could be more nuanced, like a special label for creators who arrange “branded content” deals on their own. Instagram, for example, has a special label creators can use to properly identify when a post they share was paid for by an advertiser. The label is meant to ensure the FTC can’t come in and fine creators for running an ad without the proper disclosures.

Snap has a lot of problems, and it seems clear that someone is going to have to start taking the blame. It’s not going to be CEO Evan Spiegel, which means we may see more departures in the near future from Snap’s top ranks.

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