Friday 9 December 2016

Snapchat explained: Is it really worth €20bn? Are you too old for it? How does it make its money?

Published 16/11/2016 | 09:28

Snapchat has more than 150 million daily active users. Photo: Bloomberg
Snapchat has more than 150 million daily active users. Photo: Bloomberg

Although there has been no official announcement of Snapchat's plans to file for IPO, the recent news will not come as a surprise to many - but the valuation might.

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According to a source close to the firm, the listing could come as early as March, targeting a valuation of between $20bn (€18.5bn) to $25bn (€23.3bn) for the firm.

That's nearly double the value of arguably the most high-profile social media giant to IPO in the last few years. Yes, that would be Twitter.

Because Snapchat has revenue of less than $1bn, it was able to file IPO documents confidentially.

So how exactly does the firm make its money - and can it actually be generating as much as the valuation suggests?

"There are very few people in the world who get to build a business like this. I think trading that for some short-term gain isn’t very interesting,” CEO Evan Spiegel has replied when asked why they didn't sell to Facebook.

But there is only so far innovation and creativity alone can take a firm: in the end (especially with a valuation figure like that), money talks and the most likely avenue it comes from is advertising.

Spiegel has described the Snapchat business model in three small words (appropriate for the audience with the short attention span): camera, content and communication.

"If we can always try and emphasize how important it is for both people to be [in a conversation] at the same time, that would be a win for us — that would be the holy grail," he has said.

"This captures the best parts of a conversation, that you and I are here, we’re both paying attention to each other, and that feels good."

With more than 150 million daily active users, about 60 percent of whom are aged 13 to 24, advertisers and marketers are frothing at the bit to tap into that feel-good factor.

Read more: Snapchat owner values firm at $25bn for IPO

Camera

Snapchat started in 2012 as a free mobile app that allows users to send photos that vanish within seconds. But the lenses are fast becoming the most popular feature. And whether you want to turn yourself into a dog or a taco, someone somewhere has paid for that filter. The beauty with this form of showcasing on Snapchat is that it can be scaled up or down depending on the needs of the purchaser.

Major outlets can pay for lenses on to the popular platform for the masses interested in one particular event, show or film, but the feature is also available for the smaller geographic areas for firms to target, say, just several blocks around the business itself.

Content

Snapchat brought Discover into existence in January 2015, a 'follow' tool within Snapchat that allows authors (aka advertisers) to push content that would appeal with the enormous teen audience the platform reaches.

Not only must it have cost a pretty penny for these authors to get a hotspot on Snapchat, paying for the video adverts slotted in between this content is sure to make a dent in the wallet.  At present, the video playback rate on SnapChat is reaching the levels similar to that of Facebook.

Communication

Major media outlets can push short-form content on to Snapchat for media hungry masses so content distribution is an obvious money maker.

"Somewhere along the way, when we were building social media products, we forgot the reason we like to communicate with our friends is because it's fun," Spiegel has said.

Right now, Snapchat does not allow companies directly contact users in the way that Facebook and Twitter can but having mentioned 'communication' in the business model, this could be a possibility for the firm in the future.

Where it gets a little grey

Being able to measure the impact of advertising on the platform has been a problem for Snapchat thus far - something that they have been working on trying to tease out with the help of a third party. Furthermore Spiegel is not a fan of ads which target users based on their browsing data

"We think it's weird when brands try to act like your pal. I think there's some nuance — I think it's very important to be friendly, but not a buddy," he has said.

Both of these - measurements and pointed advertising - are two areas that a marketer would first address prior to putting their hand in their pocket. So how the company is managing to still profess a valuation of some $25bn is pretty incredible.

Nonetheless, getting up close and personal with their ads is not proving a problem for the company right now. And they may change their mind in the future if the profit line isn't as upwardly steep as it apparently is now.

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