Snapchat - the new kid on the block or another well-planned trick?
Mar 6, 2016
Snapchat's explosive growth and massive valuation raise questions about its sustainability and potential as a digital scam, while challenging established social media giants.
If periods of high (or extremely high) financial speculation on products that do not profit signal a financial bubble coming, then we have a massive one around, and Snapchat raises the flag. With zero revenue until 2014, the platform has reached a valuation of $20 billion and has already raised nearly 10% of that in investment. The question is: why does a start-up with so little revenue manage to receive so much money from investors? Are we facing a new Facebook, a new Twitter, or the clearest model of a digital scam of the technology bubble?
Despite being 5 years younger than Twitter, Snapchat has already surpassed the number of active users of Biz Stone and Jack Dorsey's social network. In May, Snap had 150 million people logging in to their app against 140 million from Twitter. With five years less of life, the growth curve of users (and active users, which is even more relevant), the business has already convinced its investors (people who understand the risk) to put $1.8 billion in the game.
If you are over 30 years old, you probably, on your first contact with Snapchat, thought that it was something for idiots. The app is even less intuitive for people deeply entrenched in digital. Its design is confusing (a re-shape of design and usability is underway) and it is hard to draw parallels in its use even with Twitter, for example. Do not feel bad or intolerant. Digital has shrunk generations and now, a period of five years is enough for a generational de-synchronization. Which makes a difference of one year equivalent to a decade. This video by David Pogue will explain Snap to you.
And how can a company with relatively small revenues (forecast of a quarter of a billion dollars this year) be worth so much?
In one word: growth.
In 2014, Snapchat had 60% fewer users than it has today and had zero revenue. The market's prediction is that the little ghost will collect 400% more in 2017. As the app expanded from a network that was pure egotrip (where you published yourself to friends) to a media player with privacy, the possibilities of expansion are diverse, ranging from traffic to customized projects. The best and biggest digital media publishers have entered the platform and this is a money-making machine. Or better: it may become one.
With about 10 billion video streams per day, Snapchat has already taken Twitter and Tumblr out of the way and created a premier league championship with Facebook and Instagram. The ephemerality of the proposal (contents that disappear without leaving a mark) and the growing ego culture in the younger generations make Snapchat's profile the most conducive to growth. Snap kills competitors in the 18-34 age range and this is the fillet mignon of the audience: it consumes a lot, quickly and without thinking.
There is another important factor: video is the media that achieves the best prices among advertisers. The explosion of video consumption made possible by improvements in mobile data transmission, poured rivers of money into the market, which is why YouTube and Facebook have such advantageous positions at the moment.
However, as much expectation as Snapchat may generate at the moment, it is not necessarily the last cookie in the package. Competition in social networks is extremely volatile. After three years a tool can explode or implode. The adoption rate of a social network is deeply linked to usage behaviors and culture and these are uncontrollable. In 5 years, Snapchat may have lost its space to a competitor that has not yet been born.
Besides the uncontrollability of behavior and the fast-paced innovation process, there is a business element that is relevant. Companies that spend a lot of time without worrying about making a profit tend to never be able to do so. The company's culture tends to solidify values that later do not dissolve. If seeking profit is something in the background in the first years of the company, some kind of trauma would have to be created to reverse the trend. There are examples of this, especially in technology (the sacrosanct Facebook is one of them), but the rule is not this (read the work of Professor Clayton Christensen on innovation to know more about corporate culture and innovation). Silicon Valley and Wall Street have an unhealthy relationship when it comes to growth and sustainability and definitely SC is promising, but not safe.
It is also not likely that the company will go public now. The frenzy of tech company IPOs is over. No one is sure, but there is a general feeling that pre-IPO company valuations have numbers out of reality. In addition, despite the fantastic growth and the forecasts of $1 billion in revenue for 2017, Snapchat's business model is still not mature, according to analysts. With the nearly R$7 billion raised in investment, the company definitely won't need investments in the short term.
The company is managing resources adequately. It has made the right acquisitions, managed to attract interesting media companies to the platform, is not afraid to change what is not good (the supposed app redesign suggests this) and has enough money to wait a few years until it becomes a profitable company. Its consolidation is terrible for Twitter. There is no room for two top platforms in such a similar niche. There is a good enough environment for large growth, but it is not a sure bet.
In addition to symbolising the first generational "split" that occurred in the universe of users born in digital (it does not seem that Facebook-ers and Twitter-ers over 30 will come to like the tool), Snapchat is the first social network whose growth curve may clash with Facebook's in the medium term. At first, Snap looks like a tool that will integrate into the portfolio of a technology giant, but today, still working with possibilities, it can aspire to more than that - as long as a "disruptor" does not appear in the next three years. The social network market allows for stratospheric rises and fantastic falls.