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Snapchat eyes up gadgets to drive growth ahead of IPO

Snap, the developers behind social media platform Snapchat, are expanding their horizons into gadgets and ad-friendly software features weeks before its initial public offering.

The company has hired hundreds of hardware engineers and built a secretive product development lab, as well as scouring the landscape for acquisitions, as it pursues its newly stated ambition to be “a camera company.”

These efforts, which are aimed at developing hardware and so-called augmented reality technologies, are central to the strategy of a company that is seeking a valuation of up to $22bn in its early March IPO, despite heavy losses and stiff competition for advertising revenue from Facebook.

There is little precedent for a company with its roots in software and social networking succeeding in the notoriously difficult consumer hardware business.

The company has just launched a website, www.spectacles.com, that is selling pairs of $129 (£103) glasses that come equipped with cameras in order to allow its users to create first-person perspective shots for posting on the social network.

Augmented reality - which refers to computer-generated images overlaid on real surroundings and viewed through a smartphone or special glasses - is a big part of the company's plan. Snap’s “lenses” image-overlay feature has been a hit and gives Snap an advertising format that’s unique, at least for now.

The company reportedly spent $184m on research and development last year, nearly half its revenue.

Few US firms aside from Apple have made big profits on hardware and camera and wearable gadget makers have much lower valuations than that which Snap is seeking. GoPro, for example, looks to have been overvalued in its 2014 IPO with its stock now sitting 61 per cent lower than the initial price.

More broadly, creating new products and features that have mass-market appeal and cannot be readily mimicked is a huge challenge, analysts say.

“It’s worrisome,” said Paul Meeks, chief investment officer at Sloy, Dahl & Holst, which manages more than $1bn in assets. “Snapchat is going to have to continue to be really innovative and distinctive. It’s going to be very tough to trump Facebook.”

Facebook-owned Instagram last year rolled out a feature called Stories, modelled after Snapchat’s feature by the same name. Snapchat had about 100 million fewer downloads than Instagram in 2016, according to market research firm App Annie.

Snap had 158 million daily active users in the fourth quarter, up just three per cent from the previous quarter, compared to 14 per cent growth during the same period in 2015, according to Snap’s IPO filing. New gadgets that offer more ways to interact with Snapchat could help attract new users and get existing users to spend more time on the app.

“Ultimately, that’s what advertisers are going to be looking at,” said Douglas Melsheimer, managing director at investment bank and consulting firm Bulger Partners. Snap, along with Facebook and a host of online rivals ranging from Google to BuzzFeed, is capitalizing on the shift of video advertising dollars from traditional television to the internet.

Snap’s IPO filing reads “as if all the hard things in front of them that they have to do are already done,” said Rett Wallace, cofounder and chief executive at Triton Research, but, he added, that’s not the case. “How will they hold up against all the guys you don’t want to be fighting against in the world - Facebook, Google and Apple?”

Hardware is part of the answer. Snap has recruited hardware experts from Apple, Google, Nest and Motorola, according to an analysis of LinkedIn profiles. One former employee described ample resources and support from management for the hand-picked hardware teams.

Last spring, Snap set out to hire up to 300 hardware, augmented reality and virtual reality specialists in a single month, according to another former employee. It also set up Snap Labs, a group dedicated to working on secretive projects. Its members have reviewed acquisition targets in areas including wearable cameras, facial recognition and 3D scanning technology, according to people close to the discussions.

Spectacles itself came from Snap’s acquisition of start-up Vergence Labs in 2014. The sunglasses surprised even Snap’s earliest investors, who say hardware was not in Snap’s initial pitch to them.

“It was a disappearing messaging product and that’s it,” said Jeremy Liew, a partner with Lightspeed Venture Partners, who made the initial venture investment into Snap. Like most Snap backers, he lauded the Spectacles rollout.

Snap has acquired at least 10 startups since 2014, according to firms tracking such deals, and M&A deal makers say Snap is one of the most active shoppers they have heard from.

In January, Snap announced it would establish its international headquarters in London, expressing confidence in the UK’s ‘creative industry’ despite the country’s pending withdrawal from the European Union. 

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