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Snap Is Betting Even Bigger on Original Content, Despite Cash Burn Concerns

Evan Niu, CFA, The Motley Fool

Numerous analysts have expressed concern over Snap's (NYSE: SNAP) cash burn and financial sustainability recently. BTIG Research analyst Rich Greenfield noted last month that Snap had burned through over $500 million in the first half of the year, and just yesterday MoffettNathanson analyst Michael Nathanson said the company "is quickly running out of money."

Despite those concerns, Snap has just announced that it is diving deeper into original content, a potentially expensive and definitely risky bet.

Snapchat logo

Image source: Snap.

Expanding original content

The Snapchat parent is launching Snap Originals, which will include scripted shows and docuseries, all displayed in vertical format for mobile devices. The company is initially partnering with several prominent film and TV writers, including Bunim/Murray Productions, the Duplass brothers' DBP Donut, and Brad Weston's Makeready. Each episode will be roughly five minutes in length, and advertisers can purchase six-second, non-skippable ads.

The new shows will be featured on Snapchat's Discover page, and there are initially six series that will launch this month with another six already approved for production. The first six shows hope to appeal to younger demographics, which make up Snapchat's core user base. Snap is also adding an augmented reality (AR) twist, creating portal Lenses for some of the shows that allow users to immerse themselves in scenes.

The company also says that Comcast's NBCUniversal has extended its production commitments through 2019, and Viacom has also agreed to produce 10 additional Snap Originals.

The market for mobile entertainment is already saturated

There's no shortage of competition for user attention and video content. On the contrary, there is an overabundance of entertainment options, particularly on mobile platforms, including those owned by Snap's chief rival, Facebook. Facebook has similarly seeded original content for its Watch platform, and Instagram launched its own vertical-format video platform, IGTV, over the summer.

The challenge for Snap will be monetizing the content with ads, which may not be profitable, depending on how much Snap is investing. It's unclear precisely how much Snap may be putting toward the programming, but Snap Originals undoubtedly represent its biggest effort to date.

Investors are skeptical, though, sending shares to fresh all-time lows following the news. The company closed the second quarter with just over $1.5 billion in cash, posting negative operating cash flow of nearly $200 million for the quarter. User engagement is also deteriorating, and launching more original content in an effort to stabilize engagement may not pay off.

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Evan Niu, CFA owns shares of FB. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.