Does anyone else find this valuation incredibly ironic given that in 1999 Yahoo! bought Geocities for $3.57 billion?
I mean, does anyone believe that Snapchat is going to ever be a service that brings in billions of dollars in revenue?
I mean, does anyone believe that Snapchat is going to ever be a service that brings in billions of dollars in revenue?
Neither Snapchat nor Instagram are creating new traffic. What they are doing is essentially stealing marketshare and user engagement from competing services like Facebook and Twitter.
Their valuation isn't their revenue potential, it's the opportunity cost to Facebook, Twitter, et al for letting them survive.
If Snapchat is stealing $1bn of monetizable traffic from Facebook, Facebook would be wised to pay some amount of money (<$1bn) to either shut it down or bring them into the fold.
There is some extra valuation here in fucking your competitor over. Acquisition of hot social media companies like this is equal parts adding monetizable traffic to your network (traffic they may have taken from you in the first place...), as well as denying your competitors the ability to do the same.
So, say if Twitter acquires Snapchat, their valuation will be some combination of ${traffic_twitter_loses_to_snapchat} + ${traffic_facebook_loses_to_snapchat} + ${value_in_denying_facebook_access_to_this_traffic}
Whether or not that's worth $3.5bn is questionable, but there is some reason behind valuing non-revenue-generating products with a positive valuation.
The main "bubble" part here is whether or not this is at all sustainable (IMO, probably not). It's pretty easy to create something that steals an appreciable amount of traffic from the incumbent social network behemoths. At these valuations the cost to "recover" these eyeballs far exceeds how much the traffic is actually worth in ad revenue.
You're joking, right?
One example is YouTube; they lost huge buckets of money in their entire independent existence, until Google's acquisition completely changed the economics of their bandwidth costs. Would they have been able to become profitable if they stayed independent? Maybe!
Another one (perhaps clearer) is Broadcast.com. Never turned a profit in their independent existence; never turned a profit for Yahoo after acquisition, either.
Interesting side or foot-note was that myspace went from 600m to 50m, first purchases (enabling vcs to exit) and then disposed of (by its BigCo purhaser) after not monetizing.
http://www.quora.com/How-profitable-is-BitTorrent-Inc
"Our main source of revenue is off the toolbars we push out, which isn't a great source of monetization, but it's something. You can do the math on how many installs we have and what the monetization of toolbars is, and subtract out the costs of having 50 employees, and you'll get a reasonable ballpark of how profitable we are, although the short answer is very. Even lousy monetization works well when you have more users than Twitter."