What is driving Snapchat’s Value?
Snapchat’s assets are primarily intangible. They include the following:
- User Base
- Patents/Tech Processes
- Threat to Established Companies
I’ll rate these sources of value as objectively as possible on a scale from 0-5 so we can get a better sense of the actual value behind the company.
1. Data – 1/5
Data is the currency of the digital economy. We exchange our data for useful services. Data is the reason I’ve sold AAPL and bought GOOG. What kind of data does Snapchat get from its users, and can this data be monetized?
All that Snapchat gets in the way of useful data is your email address, phone number, age, location/time/frequency of Snaps, and any text you include with your message. With the exception of Snapchat captions, all of this data is already being exploited by other internet services. The location/time/frequency and text data can only really be useful for internal user base and engagement monitoring. Unless Snapchat develops software that can recognize the subject matter of Snaps, there isn’t much potential for data exploitation here. This is also where the ephemeral nature of the service comes back to bite Snapchat in the ass.
Text mining is much easier: see the trending section on Twitter. Captions could be monitored and exploited to suggest relevant ads. For example, say I Snap a friend with the caption “HUNGRY!!!!”. Snapchat reads my caption and communicates with the the official Taco Bell Snapchat account. Taco Bell sends me a Snap of a steaming burrito or a coupon to entice me to get off my phone and get into their restaurant.
I would have to be Snapchat friends with these corporations which would be a one way relationship, much like Twitter and Facebook users following and liking brands to receive discounts and news about their favorite products. This monetization scheme also assumes that the caption is referring to me and not the hungry cat I might be taking a picture of.
2. User Base – 4/5
Snapchat enjoys a first to move position in the market and with 350m Snaps a day, it clearly has a healthy (yet undisclosed) user base. This user base is extremely specific at the moment. 80% of users are within the U.S. and the vast majority fall within the 13-23 age demographic. This leaves an awful lot of room for growth both regionally and demographically. There are millions of untapped phones out there in Europe, India, China, and (soon to be) South America - this is a massive horizontal growth opportunity. There are millions of untapped phones in the U.S. owned and operated by the 23-50 age demographic - this is a massive vertical growth opportunity. What do you get when you add millions horizontally with millions vertically? Lots of millions. With Snapchat poised to become the world’s largest image sharing network by volume (slide 14 in the linked slideshow) it’s no wonder that investors are licking their lips in anticipation.
3. Brand - 2/5
Snapchat has built a strong brand. The yellow icon featuring “Ghostface Chillah” is easily recognizable and the app has its own terminology: “Snaps”, “Snapping”, etc. The naughty nature of the app has also garnered it much attention and a kind of endearingly unspoken *wink* *nudge* reputation among its loyal user base.
Yet a brand without a unique and useful product is...still useless. Take Kodak for example – it became one of the strongest brands in the world after the invention of the Kodak line of cameras and film. Then, starting in the 80’s, it failed to make a successful transition from the film to the digital era. Last year Kodak filed for bankruptcy. A strong brand can’t pull a company without a useful product.
Brand adds value to an acquisition. Let’s look at Yahoo’s acquisition of Tumblr. Yahoo was going for horizontal integration: Tumblr’s blogging platform provides a complementary service to Yahoo’s news-oriented service that generates revenue from ads displayed to a totally different user base. If Yahoo can figure out a way to get the previously untapped but extremely loyal users flowing from Tumblr to Yahoo, then the acquisition might prove to be very lucrative indeed.
Again, the key here is user base. Users know and trust Snapchat just as they know and trust Tumblr, so they will be more loyal and less likely to jump to another service, maintaining the strong value of the user base. They can then be funneled to a parent service that will actually generate revenue. Strong brand = loyal users = engaged user base = acquisition potential.
4. Tech innovation/patents – 0/5
There is nothing technologically advanced about Snapchat and it holds little to no value in terms of intellectual property. This rules out acquisition for vertical integration – when one company absorbs another for the technology and patents of the smaller company. E.g. Google buys Motorola for its hardware patents and smartphone technology.
5. Competition – 0/5
Large companies want to protect their market share. New services are a threat to their user base and consequently, their market share. If they can acquire these companies they can funnel their users into the larger service, preserving and enlarging their market share.
Snapchat founder Evan Spiegel likes to believe Snapchat is largely competitor-free, and that the service actually the king of a new market:
I think in general we’re going a totally different direction than traditional social media so I’m not sure that we view them as a direct competitor…so I don’t think we’re necessarily going head to head with anyone. I think we’re going a different direction.
He goes so far as to call Snapchat and Instagram complementary services. Really? I think they’re rubbing elbows in the media sharing world. Perhaps not direct competition, but they compete for user’s time and pictures nonetheless.
He expresses how “fortunate [Snapchat is] to have really, really great long term investors” multiple times throughout the interview:
We tend to build those [investor] relationships over long periods of time to make sure that our investors really understand and support the vision of the company, so it’s less of the ‘pressure’s on, get into the deal’ and more of like ‘we really need to have spent time with each other over the past year – like a lot’ for us to bring you into our family.
Snapchat’s willingness to be acquired seems to be very low given its large emphasis on long-term investment and vision. This is a change from October 2012, when Snapchat full out stated that it was unwilling to be acquired. Spiegel’s delusions of grandeur regarding the “different direction” Snapchat is headed in smell of an inflated ego and rotten revenue streams - which brings us to our next and arguably most pertinent question: How is Snapchat going to make any money?