This is hardly the first Stratechery article about Facebook to start with Snapchat . The “camera company” née social network reported earnings that were, as they say, mixed. Revenue beat expectations by 5%, but user growth, after slowing considerably for two years, went in the opposite direction: Snap’s Daily Active Users were still up 9% year-over-year, but for the first time declined sequentially (by 2%):

So what happened?

Snap’s Growth Excuses

Snap’s stated rationale for its slowing growth has shifted over those two years:

• In its S-1 , filed in February 2017, the company blamed “technical issues”:
  

  In mid-2016, we launched several products and released multiple updates, which resulted in a number of technical issues that diminished the performance of our application. We believe these performance issues resulted in a reduction in growth of Daily Active Users in the latter part of the quarter ended September 30, 2016.

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• During the pre-IPO roadshow, CEO Evan Spiegel blamed Snapchat’s performance on Android :
  

  I think broadly speaking if you look at rest of world growth as a proxy for Android, you can start getting an understanding for the performance issues we face on Android in the last two quarters.

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• On the company’s first earnings call , Spiegel pointed to the company’s restraint:
  

  I’d love to speak a little bit to the DAU question, because it’s a question that we get all the time. And I think one of the reasons why it’s such a popular question is because there’s a lot of this thing in our industry called growth hacking, where you send a lot of push notifications to users or you try to get them to do things that might be unnatural or something like that. And I think while that’s the easy way to grow daily actives quickly, we don’t think that those sorts of techniques are very sustainable over the long term. And I think that can ultimately impact our relationship with the customer.

• A year ago, on the company’s third conference call , Spiegel blamed a shift in measurement:
  

  This quarter, we grew our Daily active users at a lower rate than we would have liked, adding 4.5 million new users. This can be partially attributed to our decision to report our daily active users as an average over the entire quarter, where a strong September was offset by the more modest months of July and August. Ultimately though, we want to drive more user growth in 2018.

• In March the blame was put on Snapchat’s re-design, along with that old bugaboo Android:
  

  As we have mentioned on our past two earnings calls, a change this big to existing behavior comes with some disruption, especially given the high frequency of daily engagement of our community. While we had an average of 191 million daily active users in Q1, our March average was lower, but still above our Q4 average. We are already starting to see early signs of stabilization among our iOS users as people get used to the changes, but still have a lot of work to do to optimize the new design, especially for our Android users.

• Last quarter the re-design again took center stage:
  

  While our monthly active users continue to grow this quarter, we saw 2% decline in our daily active users. This was primarily driven by a slightly lower frequency of use among our user base due to the disruption caused by our redesign. It has been approximately six months since we broadly rolled out the redesign of our application and we have been working hard to iterate and improve Snapchat based on the feedback from our community.

Note that this last explanation is a bit different than the others: Snap was admitting that its core users were using the product less. The problem is that while social networks making blunders in the user experience is hardly a new phenomenon, the difference between Snapchat and, well, Facebook, is the lack of growth — going on for two years now — to make up for it.

And, of course, there is the reason for slowing growth that Snap’s executives can’t bring themselves to acknowledge: Instagram Stories.

Copying Audacity Redux

In August 2016, when Instagram launched what its own executives admitted was a rip-off of Snapchat’s Stories feature, I wrote in The Audacity of Copying Well that the effect would not be to steal Snapchat’s users, at least not yet; rather, Instagram Stories looked poised to kill Snapchat’s growth:

Facebook is leveraging one of their most valuable assets: Instagram’s 500 million users. The results, at least anecdotally, speak for themselves: I’ve seen more Instagram stories in the last 24 hours than I have Snapchat ones. Of course a big part of this is the novelty aspect, which will fade, and I follow a lot more people on Instagram than I do on Snapchat. That last point, though, is, well, the point: I and my friends are not exactly Snapchat’s target demographic today, but for the service to reach its potential we will be eventually. Unless, of course, Instagram Stories ends up being good enough…

Instagram and Facebook are smart enough to know that Instagram Stories are not going to displace Snapchat’s place in its users lives. What Instagram Stories can do, though, is remove the motivation for the hundreds of millions of users on Instagram to even give Snapchat a shot.

Unfortunately for Snap, Instagram Stories were more than good enough: they were soon significantly better, particularly once you take performance into account (not just on Android, but on iOS too). In fact, they were so good that Instagram’s user growth actually accelerated after their introduction, despite starting from a base of over 500 million users: 1

In short, Instagram Stories not only prevented users from defecting to Snapchat, it also took all of Snapchat’s growth, and now, after Snapchat’s re-design snafu, is likely taking users away.

Long-term Versus Short-term

Two weeks ago, after Facebook experienced the largest single day market-cap decline in U.S. corporate history, I argued that , if you looked at the company through any lens but a financial one, the company was stronger than ever.

For all of the company’s travails and controversies over the past few years, its moats are deeper than ever, its money-making potential not only huge but growing both internally and secularly; to that end, what is perhaps most distressing of all to would-be competitors is in fact this quarter’s results: at the end of the day Facebook took a massive hit by choice; the company is not maximizing the short-term, it is spending the money and suppressing its revenue potential in favor of becoming more impenetrable than ever.

That reference to “taking a hit by choice” was primarily about the reduced margins Facebook is projecting thanks to its dramatically increased spending on security; it certainly hurts in the short-term, but keeping people on the platform and regulators away has massive long-term value.

It should be noted, though, that Instagram Stories in particular (along with Stories on Facebook’s app) are in a similar vein: their strategic impact, particularly in terms of Facebook’s competitive position relative to Snapchat, will be felt for years. There is a financial impact in the short-to-medium term, though, and it may be significant.

The News Feed Ad Unit

The foundation of Facebook’s advertising business is the News Feed ad, which I described five years ago as the best display advertising unit ever:

It’s better for an advertising business to not be a platform. There are certain roles and responsibilities a platform must bear with regards to the user experience, and many of these work against effective advertising. That’s why, for example, you don’t see any advertising in Android, despite the fact it’s built by the top advertising company in the world.

So a Facebook app owns the entire screen, and can use all of that screen for what benefits Facebook, and Facebook alone.

Something like this: