Brief:

• Snap announced it will stop paying licensing fees to publishers for their Snapchat Discover channels, making them dependent on advertising revenue. The company in the past few months has notified publishing partners of plans to stop paying an upfront licensing fee for daily and weekly content on Snapchat's media section, according to Digiday.
• Snap has reverted to sharing ad revenue generated from Snapchat Discover, typically in an even split with publishers. The move reverses a 2016 proposal to change its terms with Discover publishing partners to pay a flat upfront licensing fee in exchange for keeping all of the ad revenue. It's not clear how many publishers agreed to these terms.
• Snapchat has more than 90 media partners producing Discover publisher channels or video shows, and the possibility to earn guaranteed income was a solid incentive to produce content for the platform. NBCUniversal, an investor in Snap, Viacom, BuzzFeed and Refinery29 are among the media companies that produce content for Snapchat Discover.

Insight:

Snap's move to end upfront licensing fees to publishers on the Discover platform is a way to cut fixed costs and give its media partners more incentive to sell advertising. However, driving traffic to publishers' Snapchat content will be key for the advertising strategy to be successful, which could prove to be a challenge as traffic has been down since a recent Snapchat redesign. Snap also is creating a more standardized template for its content and ad deals that don't give major media companies especially favorable terms, per Digiday.

The news comes as Snap is coming off a turbulent first year since its March 2017 initial public offering as investors have been unforgiving of missed growth targets, multimillion-dollar losses and heightened competition from rivals like Facebook and Facebook-owned Instagram, platforms that have copied some of Snapchat's popular features. Last week, Snap reported double-digit growth among several key metrics, but Wall Street was still disappointed. Snapchat's user base grew 15% in Q1 2018 from a year earlier, but still missed the average analyst estimates. The biggest disappointment was the company's forecast of revenue growth that would "decelerate substantially" as Snap shifts to programmatic ad sales.

Some of its slower user growth was attributed to a controversial redesign — which is now being reversed for some new features — but the shift into programmatic ad placements has negatively affected prices for Snap Ads, the vertical video ad unit that runs inside Discover video shows and publisher channels. Pricing on ads, excluding Story Ads, plunged 65% from a year earlier. At the same time, the company is making efforts to appeal to publishers seeking to monetize their creative efforts. Snap has tested mobile commerce inside various Discover channels and let publishers run branded content as ads within their editions.