Can Snap’s Universal Music Deal Help It Counter TikTok?

Snap (NYSE:SNAP) recently signed a new licensing deal with Universal Music Group (OTC:VIVHY), the world’s largest record label, to add its songs to Snapchat’s library of Sounds and AR Lenses.

Snap previously partnered with UMG to promote its music videos and AR lenses, but the new deal will allow Snapchatters to directly integrate thousands of songs from UMG’s own artists into their posts and messages. Users will also be able to share the full tracks from third-party streaming services.

This deal marks an expansion of Sounds, a feature for adding music to Snaps that was launched last October. That deal incorporated some licensed tracks from UMG, Sony (NYSE:SONY) Music Entertainment, and Warner Music Group. It also rolled out additional features — including Search, Shortcuts, and Playlists — to help Snapchatters quickly find the right Sounds for their videos.

A smartphone user listens to music with headphones.

Image source: Getty Images.

Since then, Snapchat’s users have integrated Sounds into 521 million videos that generated 31 billion views. Therefore, it isn’t surprising to see Snap expand its deal with UMG to add more songs to Snapchat.

But is this deal all about beating TikTok?

However, Snap’s integration of more songs into Snapchat also seems like a response to ByteDance‘s TikTok. TikTok offered similar musical features long before Snapchat, and it struck a similar deal with UMG back in February. Prior to that, TikTok signed licensing deals with Warner Music Group and Sony Music Entertainment.

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Snap’s new musical features and licensing deals will likely support Spotlight, the TikTok-like feature it rolled out last November. Snapchat paid $1 million in daily cash prizes to its top Spotlight creators for about half a year, but it’s still unclear if the new feature will help it keep pace with TikTok.

Snapchat and TikTok started out in different places. Snapchat’s vanishing Snaps and Stories were designed for private messages, while TikTok fostered a competitive environment for public short videos.

However, Snapchat expanded into the public video space with its Discover tab, which features professional and user-submitted content, and its Snap Map, which organized public videos on a map. Meanwhile, TikTok became more like Snapchat with direct messages, private videos, and AR filters.

In other words, the two apps — which are both popular with Gen Z and younger millennial users — started to offer overlapping features. That overlap likely sounded alarm bells at Snapchat, which had just weathered fierce competition from Facebook‘s (NASDAQ:FB) Instagram.

Why Snap investors should keep an eye on TikTok

In Piper Sandler‘s spring survey of U.S. teens, 31% of respondents chose Snapchat as their favorite social media app, compared to 30% for TikTok and 24% for Instagram. But last fall, 34% selected Snapchat, 29% chose TikTok, and 25% picked Instagram.

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Many teens likely use all three apps, but Snapchat’s shrinking lead sparks concerns — especially as TikTok expands into its backyard. If TikTok rolls out native group chats, which already exist on its Chinese counterpart Douyin, it could replace Snapchat as the top messaging app for U.S. teens.

TikTok had 689 million monthly active users (MAUs) worldwide at the beginning of 2021. Snap doesn’t regularly disclose its MAUs, but it ended last quarter with 280 million daily active users (DAUs) — a third of whom were in North America.

Snap’s North American DAUs only rose 5% year over year during the quarter, compared to its 9% growth in Europe and 55% growth across the rest of the world. Therefore, Snap needs to keep expanding overseas to grow its total DAUs — but it could face fierce competition from TikTok across many countries.

Will licensing more musical tracks hold TikTok at bay?

Snap’s new licensing deal with UMG might encourage more of its users to create more musical videos and lenses. But Snap is still clearly playing defense instead of offense against TikTok, and it’s unclear if Spotlight will fare any better than other TikTok clones.

Snap also didn’t disclose the terms of its new deal with UMG. Music licensing deals can be expensive, since record labels hold all the cards, and Snap still isn’t profitable on a GAAP basis. Therefore, licensing a bunch of popular music could be a costly way to counter TikTok.

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Moreover, TikTok already holds similar licensing deals with the big three record labels, so I doubt Snap’s UMG deal will suddenly tilt the scales in its favor.

The bottom line

I’m still bullish on Snap — I’m impressed by its DAU growth, rising ad prices, and the expansion of its ecosystem — and it remains one of my portfolio’s top-10 holdings. But I’m also keeping a close eye on TikTok since Snap’s latest moves all suggest it’s evolving into a major rival.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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