When Snapchat became popular in 2013, many thought the messaging app would disappear almost as quickly as its vanishing messages. Instead, it has become one of the most intriguing internet companies to emerge in years.
Snap, Snapchat’s parent company, filed for an initial public offering on Friday, at an initial size of $US3 billion ($3.9 billion). It plans to raise as much as $US4 billion in the IPO, people familiar with the matter have said, for a market value of as much as $US25 billion.
Its market debut will be the most closely watched since Alibaba, a Chinese e-commerce giant, floated in 2014.
Snapchat has captivated youngsters in the West with its quickly disappearing content and playful features. It appears to have connected with youth more successfully than older rivals such as Facebook (or its messaging service, WhatsApp). Users share digitally enhanced photos and videos of themselves vomiting rainbows and morphing their faces into animal masks. About 41 per cent of Americans aged 18 to 34 use the ephemeral messaging service every day, and 150 million people globally spend time on it every day.
Grown-ups should pay attention, too. Snapchat is experimenting with new technologies, such as augmented reality (AR) and wearable devices. A large share of people who have used AR will have experienced it on Snapchat, where users can overlay computer-generated images on photos and videos.
Snapchat has prospered from access to the camera on every smartphone, and now it wants to sell hardware as well. Its new sunglasses, called Spectacles, sell for $US130 and enable users to record video from their exact line of sight. They have caught the attention of analysts, who are impressed by the glasses’ ambition, functionality and clean design.
Litmus test
How well it fares as a public company will also serve as a litmus test of whether it is possible to prosper in the shadow of digital behemoths such as Facebook and Google.
Snapchat has a different outlook. Facebook creates permanent records of users’ lives; Snapchat offers liberating impermanence. On most social media sites, people post about their achievements to a huge circle of acquaintances; Snapchat’s users share images of themselves looking silly with smaller groups of friends.
It started in 2011 as Picaboo. It was created by three members of a fraternity at Stanford University: Reggie Brown, Bobby Murphy and Evan Spiegel (now Snap’s chief executive). The app, which they later renamed, was not an overnight sensation that crashed the internet, as Facebook did at Harvard. It lay virtually undiscovered for some time, until high school girls discovered it and started using the app to send (sometimes risque) messages.
Mr Spiegel has proven himself to be creative in devising new features for Snapchat’s app and in imagining how it may evolve. At first it was a one-to-one messaging function for people to send disappearing “snaps” to one another.
Three years ago Mr Spiegel launched a one-to-many broadcast function, called “stories”, where people could string together images and videos and share them with all their friends at once. In 2015, it launched “Discover”, where professional publishers offered a selection of disappearing articles and videos tailored to Millennials (The Economist publishes on Discover).
Snapchat has innovated in other ways, too. It shows users how many snaps they have sent and received since joining, and they try to keep this score high. It invented “streaks” that keep track of how many consecutive days friends have sent messages back and forth. When Braden Allen, a 16-year-old in Dallas, whose tally of sent and received snaps stands at about 170,000, needed a break from Snapchat to study, he gave his log-in information to a friend to keep sending on his behalf.
Distinctive features
Lenses are another distinctive feature. When people take selfies, they can choose to alter their appearance, becoming an animal, switching faces with a friend or doing other fantastical things with the app’s facial-recognition technology. Snapchat has quietly become the most-used augmented reality product in the world, says Ben Thompson of research company Stratechery.
Although Snap encourages users to be silly on its app, it hopes to be taken seriously as a business. It will need to decide what approach it should take when using information about users to target advertisements. Mr Spiegel has called the practice “creepy” in the past. Yet Snap may need to share more data about its users; Mr Spiegel has indicated that he may be willing to do this.
The company has started to allow advertising in between users’ stories and in the middle of publishers’ articles on Discover. Brands can also buy sponsored lenses. For example, fast-food chain Taco Bell has paid for a lens that allows users to change their faces into tacos. These promotions can be expensive, at about $550,000-$800,000 for a lens that is available across the US for a day, and can take some months to prepare. Snap insists on keeping some creative control, and can veto projects it thinks look too much like basic advertising. That has irked some brands in the past.
Snapchat is nowhere near earning the sort of advertising revenues that Google and Facebook bring in. Those two scoop 58 per cent of digital advertising in the US and last year claimed nearly all of the market’s growth.
One of the world’s largest advertising agencies spent $US60 million on Snapchat in 2016, compared with $US1 billion on Facebook. The same agency expects to spend $170 million on Snapchat this year.
Snap may have about $US1 billion of revenue in 2017, three times its total sales in 2016. Advertisers certainly welcome the prospect of having an alternative to the Facebook-Google duopoly, says Chris Vollmer of consultancy PwC.
Yet there are questions over how large Snapchat’s user base can become, and if it can support the high sharemarket valuation that is talked of. The app has yet to establish that it has strong appeal for older users, for example. In emerging markets, it costs more to use lots of data on smartphones, and Snapchat’s data-intensive app is less widely used.
Brian Wieser, an internet analyst, reckons Snapchat is an “important niche player” but will never achieve the scale of Facebook.
It doesn’t have to target more than a billion daily users to be a valuable company, but Mr Spiegel will need to be careful not to oversell the app’s potential reach, as Twitter did when it went public in 2013, promising to attract “the largest audience in the world”.
He has so far focused on Western markets, whose users are most valuable to advertisers, in contrast to Facebook and Twitter, which emphasise their global reach. He is expected to point to high user engagement with Snapchat, rather than relentless user growth, as the gauge investors should watch. This will require a shift in thinking for sharemarket investors, who have been trained by Facebook, Twitter, LinkedIn and several other internet companies to demand fast-growing audiences.
Individually designed
Snap’s profit margins in its various business lines may also disappoint: they are unlikely to be as generous as those of Google and Facebook, which both fulfil a lot of their advertising orders using automated programs. Because its advertisements tend more often to be individually designed, it relies on a large, human sales force. Selling also takes more time, as it does in television.
Mr Spiegel will also need to prove his ability to lead. Many of his boosters compare him to the late Steve Jobs for his creative, perfectionist vision of products. He may resemble Mr Jobs in more negative ways, too. He is secretive and controls information tightly. No one but Mr Spiegel – not even the board and other top executives – knows all the important details of the company’s strategy and future plans. He is off-limits to most employees and travels between Snap’s buildings in a black Range Rover with a security detail.
Some early backers also privately express concern that the talent pool behind him is not as experienced as they want. Adult supervision will come from Michael Lynton, a seasoned entertainment executive, who is resigning from running the film studio of Japan’s Sony to serve as Snap’s chairman. But there are few like him at the company.
The competition against Facebook and Google (which owns YouTube, an online-video site, against which Snapchat will directly compete for advertising dollars) is unlikely to let up. Facebook tried to buy Snapchat for $US3 billion in 2013, and has since then copied many of its popular features.
Last summer, Instagram, which is owned by Facebook, launched its own “stories” feature; its parent company is now testing the idea of rolling out this feature on its own social network. Usage of Snapchat stories has declined significantly since Instagram stories began. That may shake the faith of some Snapolytes, who believe that Snapchat has had sufficient allure to keep its young users away from Facebook’s properties and those of other internet companies.
The public offering stands as evidence that Snap wants to stay independent. But Facebook or Google may still buy it. “That is why I would not short the stock,” says one hedge-funder, who is sceptical about the high valuation it is likely to receive. Mr Spiegel must know that his company, as one of the only real threats to the two giants, will be a prize for either of them.
If Snap wants to survive as an independent company, he may need to make some smart acquisitions of his own, as Facebook did by buying Instagram and WhatsApp.
One opportunity may be visual search. Snapchat’s users are using their cameras to capture the world around them. When they point their smartphones at objects, they may be served with advertising. Only Mr Spiegel knows the plan. But in the highly concentrated internet ecosystem, companies increasingly must eat or risk being eaten. The coming years will show if Snap is predator or prey.
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