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Snap Spectacles Engagement Is Terrible, but We Already Knew that

It hasn't been a good week of news for Snap (NYSE: SNAP) Spectacles. The Information reported yesterday that Snap has accumulated "hundreds of thousands" of unsold Spectacles after grossly overestimating demand for the product. Regulatory filings also show that Snap has $29 million of additional purchase commitments related to hardware inventory. There's a good chance that Snap will soon have to eat an inventory writedown from overshooting its demand forecast.

Business Insider now reports that Spectacles engagement plummets after about a month of use, citing internal company data. After approximately four weeks, less than half of Spectacles users are still Snapping via the camera-equipped sunglasses. BI's source called the retention rate "shockingly low," and noted that a meaningful proportion of users stop using Spectacles after just one week. A Snap spokesperson wouldn't confirm details of the report, but defended Spectacles by noting that 73% of reviews on Amazon.com were 5 stars.

Image source: Snap.

However, there are only 71 customer reviews on the e-commerce site, hardly a meaningful sample size when Snap has sold over 150,000 units to date. Besides, customers that simply lose interest in Spectacles are unlikely to leave a review saying, "Meh."

Spectacles engagement in Q1 was horrendous

BI's report further confirms what investors have already known all along: Spectacles engagement is awful. For example, CEO Evan Spiegel said on the Q1 earnings call that approximately 5 million Snaps had been created with Spectacles to date, or about 0.002% of all Snaps created in the first quarter. That averaged out to about 80 Snaps throughout the entire quarter, based on the estimated 64,300 units that the company sold in Q1 -- around 2.7 Snaps per day created with Spectacles.

On average, daily active users (DAUs) spent over 30 minutes on Snapchat in the first quarter. If Spectacles users are only Snapping three times per day with the shades, it goes without saying that they're spending the vast majority of their time on the platform doing other things.

Snap did not provide much color around Spectacles in the second quarter, other than to say that Spectacles revenue declined sequentially to approximately $5.4 million (good for about 41,900 units).

The emphasis on hardware is a self-inflicted problem

On one hand, it shouldn't be a huge deal if Snap's hardware efforts fail spectacularly. Snap's core business is advertising (which it should be focusing on more anyway), and Spectacles revenue was less than 3% of sales in the second quarter.

The self-inflicted problem is that Snap is trying to rebrand itself as a "camera company" that wants to have greater control over how users experience Snapchat. Spiegel continues to emphasize the importance of hardware to Snap's future, despite the fact that Snap has little experience with hardware and Spectacles have flopped.

"Our view is that hardware is going to be an important vehicle for delivering our customer experience, maybe in a decade," Spiegel said at Vanity Fair's New Establishment conference earlier this month. "But if we believe it's going to be important in a decade, we don't want to be starting a decade from now."

Consider how different investor perception would be if Snap said hardware was just an experimental side project -- the same stance that Snap's larger rivals take -- but it was more focused on growing its nascent ad business by adding new augmented reality (AR) features over time while monetizing strong engagement. Narratives are incredibly important in investing; if Spiegel tells investors that hardware is key to Snap's future, he shouldn't be surprised when investor sentiment sours when its hardware products fail.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA has the following options: long April 2018 $17 puts on Snap Inc. The Motley Fool owns shares of and recommends AMZN. The Motley Fool has a disclosure policy.