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What Snap's IPO tells us about Spectacles' future

It will be difficult for the company to mass-produce the gadget.
What Snap's IPO tells us about Spectacles' future
Cherlynn Low
Cherlynn Low|@cherlynnlow|February 6, 2017 12:35 PM

When Snap Inc. officially filed its IPO last week, we finally got our clearest look yet at its operations. In addition to learning that its co-founders will be donating as many as 13,000,000 shares of their stock to a philanthropic organization the company quietly set up, we also found out just how much Snap paid for its acquisitions of Bitstrips and Vurb.

But perhaps the most interesting nuggets from the filing document (also known as the S-1) are the insights about the company's first, and so far only, hardware product: Spectacles. The video-recording glasses were generally well-received when they launched back in September, and have since been the subject of much media fascination. Despite a limited rollout, and CEO Evan Spiegel referring to it as a "toy," the device is clearly an attempt to come up with another way to make money so that Snap doesn't have to rely so much on ads for income. And although we still don't have concrete sales figures for the glasses, the lines with hundreds of people waiting for hours already speak to the gadget's popularity.

Yet, as the IPO filing shows, Spectacles have a long way to go before they make Snap any money. The document states that Spectacles "has not generated significant revenue for us" and that sales from the device were "not material." But that doesn't mean the company will stop working on it. And, to be fair, Snap was not expecting the glasses to be a huge moneymaker right off the bat.

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According to the S-1, Snap plans to "significantly broaden the distribution of Spectacles," which, for now, can be purchased only at temporarily installed vending machines in select cities. A more permanent store in New York City is slated to stay open through February 19th. Making the glasses more widely available, whether by bringing the vending machines to more regions or by letting people order them online, will give the company a potentially much larger audience and could significantly increase sales.

But another tidbit in the IPO document reveals how challenging scaling up Spectacles production could actually be. Snap admitted it has "limited manufacturing experience" and that it relies on only one contract manufacturer to build Spectacles. This explains the limited availability of the device to date, and it also means it will be difficult for the company to mass-produce the glasses or ship them globally going forward. As stated in the filing, its supplier "is vulnerable to capacity constraints and reduced component availability." This also means Snap is extremely reliant on its manufacturer, especially because it has "limited control over [the] manufacturer's quality systems and controls."

Typically, using one manufacturer means greater assurance over the product's quality than employing several suppliers. But we've already seen breakdowns in quality control, with a recent report of one Spectacles owner's charging case melting. Snap dutifully replaced the defective product; that sort of event is easy to handle when it's an isolated case. But when targeting a massive global market, addressing quality-control issues can become challenging.

Nailing the manufacturing process is important for Snap, especially if it decides to launch other physical devices. The company states in its S-1 that it "may develop future products that are regulated as medical devices by the FDA," which will have to pass stringent tests. This also means it needs to have excellent quality control.

And before you get too excited about the idea of Snap making "medical devices," it's important to note that Spectacles is already classified as such, since it is an "eyewear product." These future products could simply refer to upcoming iterations of the device.

Ultimately, though, such documents tend to be vague and speculative, as they need to be all-encompassing to show potential shareholders the calculated risks involved in the business. You'll find similar language in almost any other company's annual report, along with a disclaimer that forward-looking statements aren't meant to be taken as fact or at face value.

Still, with these disclosures, we've learned a bit more about Snap -- in particular about its dependence on ad revenue and the fact that it is comfortable waiting "sometimes for a long time" for its products to reach maturity and gain enough traction before it starts profiting from them. So while Spectacles isn't likely to be a big source of income for the company now, the device could eventually become a significant revenue maker if Snap can figure out a strategy that works.

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What Snap's IPO tells us about Spectacles' future