Snap Won't Grow Users Unless It Does Something Different

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Instagram Stories use is accelerating while growth at Snapchat slows.

Instagram announced yet another milestone in its Stories user growth. The feature now has 250 million daily users in the Instagram app, which has 400 million monthly users overall. That's a 50 million user increase from its last milestone announcement in April. It also marks an acceleration in user growth, as it took about three months for Stories to reach 200 million from 150 million and 150 million from 100 million.

Meanwhile, Snapchat is falling behind. The app's user growth has slowed ever since Facebook (NASDAQ: FB) introduced Stories in Instagram last summer. Snapchat downloads over the last couple months fell 22% year over year. By comparison, Instagram downloads increased during the same period. The impact on Snap (NYSE: SNAP) and Facebook is evidenced by the divergent paths of user growth for their respective apps. And Snapchat's growth won't turnaround unless management starts to do something different than its competitors.

The network effect in full force

Instagram is greatly benefiting from the network effect at the expense of Snapchat. Over 700 million people already have Instagram installed on their phones, an account set up, and log in at least once a month. So, when a friend asks about Instagram Stories, it's just a few taps away for someone to check out and start sharing. Setting up a Snapchat account is comparatively much more involved. (I know, it's just an app, but people are really lazy. Like, really.)

Just as importantly, if not more so, people already have a network of friends and followers on Instagram. That means they don't have to go through the whole process of building a new network on another app just to share stuff they could share on Instagram.

And that's what's really giving Snap a headache. It's not that users are abandoning Snapchat for Instagram Stories. It's that they never even download the app in the first place because Instagram has co-opted its functionality and made it even easier to use.

With user growth accelerating, Instagram Stories seemingly hasn't even hit critical mass. And as it rolls out new features like public Stories based on hashtags and geolocations, investors should expect user growth to continue accelerating at the pace of updates. The latest update is integrating live video replays into Stories, which could encourage fans of live video to check out Stories if they've never done so before.

Snap is trying to move in a different direction

Snapchat isn't going to be able to compete with Instagram on the stories format. Even if it comes up with a great innovation in the format, there's a team of engineers that will be able to copy it before too long.

That's not to say Snap is completely doomed. To be sure, Snap's management is focusing on an area that's impossible for competitors like Instagram to replicate: original content.

Snap has signed deals with several big media companies including Time Warner (NYSE: TWX) to produce original content for viewing within Snapchat. The shows will only last a few days before they disappear forever, so it should theoretically drive more engagement on a daily basis from Snapchat users.

There are two major problems with the strategy for Snapchat, though. First of all, original content costs money. Snap and Time Warner plan to spend $100 million over the next two years producing 10 shows. Along the same lines, Snap will have to share ad revenue with the content creators, further increasing its cost of revenue.

The second problem is that Snap is focusing on quantity instead of quality. Nobody talks about how they had to watch the Bachelor recap show on Snapchat on Tuesday. Facebook, by comparison, is reportedly looking to produce high-quality shows of the same caliber as House of Cards , for example. It's the kind of must-see TV that gets users to come back week after week.

Getting outplayed by Facebook

Snapchat has quite a challenge on its hands, taking on the 800 lb gorilla of Facebook. In its S-1 filing with the SEC, the company said its biggest competitive advantage is its ability to innovate. Well, it turns out that's not really a competitive advantage; Snap's innovation led to 250 million daily users in another app.

Snap's strategy to pursue original content also has its faults, but at least it's a move in a direction that will be much harder for competitors to co-opt like the stories format. Ultimately, it needs to find something that both resonates with users, advertisers, and is hard to duplicate. That's much easier said than done.

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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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