Snapchat is Intrinsically Worthless
roymurdock.com
roymurdock.com
One of the common themes in investing is "what am I missing?" and this piece is a great walk through through a reasoned set of parameters that might make a company or project more or less valuable. The assertion that SnapChat is 'Intrinsicially' worthless is of course false. For something to actually be "worthless" in a free market would require that either no one would offer any value in exchange for partial ownership, or there would have to be outright fraud. We say a 'fake' Van Gough is worthless because it is worth much less than an original, but someone might buy it because they like the painting and they can't afford an original. As a painting it would probably be worth more than a print. But not actually "worthless."
So what is he saying? He says that Snapchat's recent valuation was much higher than he would have put it. And we can ascertain that like the forgery vs. actual painting the difference in the two numbers is large.
So what is the basis for this disconnect? It is this:
" $4bn for an easily replaceable service that is little more than Microsoft Paint duct taped to a disposable camera? A service that voluntarily throws away its own data in the golden age of data hoarding? A service devoid of the nature of competition that is the driving behind every other profitable company in the world?"
The focus here is on the tech and not the market. A pet rock was 'worthless' (the rock was just a rock) but the connection with a generation was valuable. So often in our business we look at something that we feel like we could build (or could be easily built) and a valuation, and focus on those two things. The parts we don't see we give little value to (350M snaps? Seriously? That is a boat load of engagement). Making anything that get 350M 13-23 yr olds engaged is a pretty huge deal. That is what is valuable with Snapchat, not the tech.
Here's some of my ideas and they all involve in-app purchases:
* Corporate deals that allow you to place products in your snaps, kinda like Photoshop. Example: you pay $0.99 to be able to place a character from South Park in your Snap.
* High-quality snaps, that take advantage of your camera's full resolution
* Sound snaps, so you can record 30 seconds of audio and send it to a friend. Great for sharing tracks you make or music you're hearing, or just to record some idiot yelling on the bus.
There are many more possibilities. Snapchat can almost be thought of as a "social game", a sort-of cross between FarmVille, Instagram and Twitter. You can still share basic things to your friends, but you can pay to send even better things. My ideas may or may not be shitty, but they still prove that the service probably can monetize, in my opinion.
I tried to stay away from poking fun at the simplicity of the technical aspects of the service as much as possible, and I didn't mean for the article to come across as tech-focused.
All I meant with the MS Paint/duct tape comment was that it wouldn't be hard for a competitor to recreate the service - in fact Facebook Poke has already tried and failed due to your observation that it takes a certain "connection with a generation" to make a seemingly silly product successful. That, and Snapchat was the first to move to the market, giving it a huge inertial advantage over Poke.
The main point I wanted to make was most definitely market focused: Snapchat has built itself a user base in a market that it can't monetize by itself. It can continue to gather users 'til the end of time, but it will never be able to get any revenue from them without altering its service and driving users away. Therefore Snapchat is intrinsically worthless.
This is distinct from the statement that "Snapchat is worthless" - clearly it isn't extrinsically worthless because it can be used as a funnel to get users to other parts of the internet that might generate revenue. So there is some basis for valuing the company.
The question then becomes how much is it actually worth? I'd love for someone to help me out and stake a valuation for what they think Snapchat is actually worth.
Less than $4bn is my estimate. How much less? Not so sure.
The correct answer is 'what someone will pay for it.' But I recognize that answer is unsatisfactory. Correct me if I am wrong, but I believe you are asking "What line of reasoning about Snapchat results in the highest valuation?" Or to put it differently, how does someone convince themselves that Snapchat could be worth billions rather than a few million at most.
I suspect the answer goes something like this;
1.) 13 - 24 year olds spend a big chunk of money (http://www.bls.gov/cex/2012/combined/age.pdf)
2.) They compose a cohort of approximately 50M individuals. (http://www.census.gov/popest/data/national/asrh/2012/index.h...)
3.) Smartphone ownership in this market is high, and skewed to the high income members (http://www.nielsen.com/us/en/newswire/2012/survey-new-u-s-sm...)
4.) At an estimate of 305MM 'snaps' per day, assuming multiple snaps per user. We can estimate that Snapchat has something north of 70% of the high income youth smart phones captured.
What is that worth? Can you entice them buy 1 thing? What is the biggest expense of any transient product? Customer acquisition. What would you pay to say something to nearly every customer in your market?
Well we know from the SuperBowl that 30 seconds of your time, once a year, might be worth $4M (http://variety.com/2013/tv/news/super-bowl-ads-fox-seeks-4m-...).
My guess is that if your in a product space that depends on consumers in this demographic, then being able to talk to them through SnapChat would be as valuable as a SuperBowl advertisement to you. And if you are an investor, owning a piece of that channel might appear to be a very good bet.
Furthermore, even money itself has no intrinsic worth. The old Indian adage of "when all the trees are gone, ... try to eat money" reminds us of the mania of collecting things that have little value on its own.
What does this mean in the context of Snapchat? Firstly, snapchat trades in the attention of a particular demographic. The market has shown that it is willing to pay for the attention of this group - witness how much advertisers spend on tv. However, the younger set are watching less TV than their predecessors. Ergo, the advertising spend will have to follow where the youth are. When young people were in cars, billboards were real estate. Bill boards themselves have no intrinsic value, but it didn't stop people from making money (Ted Turner's dad ran a billboard business).
The real question is whether Snapchat will endure past a couple of seasons in its present format. There was a time when Twitter was cool, but now it has repositioned itself as a real time news feed. I think Snapchat has creates real value. Kids get the validation they crave for in a social network, but not have to worry about a permanent record of their activities being archived somewhere. Even if this is not worth money to kids, it generated value to a concerned parent.
The $4/user comes from here: http://techcrunch.com/2013/01/30/facebooks-revenue-per-user-...
The Snapchat team is ostensibly pretty talented, and apparently on fire right now, so who knows, they might start something new on the side and link it to Snapchat which may really take off.
How much would you pay to own that beach? How would you justify that investment -- would you plan to charge an admission fee? Would you wrap the beach in ads and sponsors? Would you charge to build sandcastles? Would you sell concessions?
I think it's helpful to think of SnapChat and many other businesses with this metaphor.
Ownership of the beach is clearly valuable, even if it's unclear exactly how you will extract that value. And beach popularity can be subject to trends and other outside factors.
It's also easy to ruin a beach, and therefore its value by too aggressively trying to get the value out of it. For instance, I'd rather keep the beach free of ads and aggressive tourist sales people to make my money on hotels, condos, and restaurants near to the beach.
I'd say the biggest problem with the analogy is that only part of a beach's value is derived from the other beachgoers - there is some intrinsic value to the combination of sand, sun, and waves. For snapchat, if there are no other users, there is no value at all.
The very large problem with this metaphor is that you are not taking into barriers to entry. Beaches are valuable in the real world because it's impossible to change the ocean and extremely costly to remove rocks, import sand, bring in wildlife, build access points and accommodations, etc. to suit the needs of the beachgoers.
The digital beach market has low barriers to entry. If Snapchat ruins its beach with advertisements, pollution, and annoying fruit vendors, then users can very easily and very quickly move to another beach of similar or higher quality that can be built in a matter of days.
End game.
We'll see if snapchat can hold the throne after serious monetization.
I don't know, the article came across as missing the point in my opinion.
Rather, you want to be smart at the right time and convince other incredibly smart people to do something incredibly dumb in that fleeting moment.
Last I checked, most of us have never created a messaging app that grew to 350M messages in two years. More importantly, most of us didn't also then convince smart investors to let us cash out at some ridiculous valuation.
Props to the Snapchat guys and I hope they figure out monetization but at the end of the day, they got their FU money and built something huge. That's a win in my book.
But like you said, that's fine.
Props to the SnapChat guys for cashing out, raising a ton of venture from sheep VCs and getting millions of users? YES, absolutely.
Props to the SnapChat guys for creating something of value, substance, technology, IP, etc. None, zero. Just another BS app riding the wave of the top-10 in the appstore.
It's not a WIN for society when you create garbage that has some sort of value to it. It's just more clutter. But maybe it doesn't matter, people need entertainment, people need dick picks, bad Hollywood movies, Miley Cyrus - these are all business commodities. And if you're capable of that vs. nothing else, good for you.
“You only have to do a very few things right in your life so long as you don't do too many things wrong.” Warren Buffett
Is this what our industry has come to? Congratulations for raking gullible investors? Like, that's not only socially acceptable, but a worthy outcome that should be applauded?
Let's also not forget that most of these people who can rich via this route know for a fact that they are selling a shit sandwich to the company that is acquiring them. Do SnapChat founders really think this business is going to make billions in revenue and survive for years? This is the equivalent of 'flipping' in real estate. Take the money and run. You can admire it, but don't ignore the damage and waste it leaves behind to the main stream investors whose equity was handed out in an acquisition for these kinds of companies.
I'm much more interested in companies which create lasting value or solve real world problems.
SnapChat isn't much different. Just another "trendy app" that VC's love to throw money at since their partners invested in a previous competitors.
I just mention this apropos of nothing.
The US is still in possession of a handful of islands claimed under the Act. A few are even still in diplomatic dispute.
Oh please!
Sure you can recreate the app pretty easily which, you can also do for most services (this does not mean scaling to the users they serve) but that is not the value of the service.
It's also why 'hackers' typically don't make great investors see: https://news.ycombinator.com/item?id=8863
Snapchat is firmly entrenched in its spot due to its first-to-move position (see Facebook's failed "Poke" project) but the point is that if it tries to change the service in an annoying manner then there is nothing to stop people from moving to an identical (or better) service that does not annoy them.
I agree with you that Snapchat is intrinsically worthless, hence the title of the article.
Even if it was eventually acquired, how could the service be augmented to funnel users into a parent company (Google, Facebook) when the very nature of the application is to create media, then delete it. This builds no links or references to outside sources, no galleries of images, no way to generate ad revenue.
For the second part, Google makes billions figuring out how to get ads in front of its users. I'm sure they'd be able to do something for Snapchat.
Or maybe the return on the $4bn investment isn't worth the brain and manpower necessary to wrestle the app into some kind of monetization scheme?
e.g. Sure we promised not to save your snaps, but we never promised not to remember who you shared your snaps to, what was in your snaps (think Google Goggles), how often you snap, etc.
The comment you replied to answered that: Because of the hypothetical situation that Google would want to pay $5bn for it. You'd buy it to shop it around to the big players.
To a certain extent, the valuation of some companies can be pumped on the basis of to what extent the big players are likely to be competing for it, and not always on the basis of possible revenue, but strategy too. E.g. denying a competitor a company that is seen as having some percent chance of being a threat if paired with the competitor, or buying a company that is seen as having some percent chance of helping you become a threat.
Consider that even if Snapchat on its own was/is worth 0, if SnapChat has even a tiny chance of helping Google propel G+ into the position of a viable contender to Facebook, Snapchat is suddenly worth a huge amount to both Facebook and Google. It might even be worth a lot to Google even if Facebook only thinks that the combination would be a threat, if it'd make Facebook tie up lots of resources trying to "counter the Snapchat threat".
(in that vein, I think that one of the ingenious part of the massive Gmail quota was that while it got quite a bit of PR attention that mostly swayed geeks, it terrified large parts of Yahoo - I was at Yahoo when Gmail "hit" - and it tied up hundreds of man-years worth of product manager, engineering managers, developers, marketing people and others radiating out from the Mail team, all trying to figure out how to respond; I can only imagine the same must have been the case in Hotmail and others; as a feature Google could've offered a much smaller increase over the competition and still gotten most of the PR, but that huge bump, which was largely symbolic, triggered massive resource hogging responses from competitors)
And a lot of that kind of thinking boils down to guesswork, which can work both for and against them in terms of valuation.
* 350m snaps per day + potential growth - At least 3 interaction screens per snap (pre-view/view/post-view): that's over 1bn places you could put, say, ads per day. Do the CPI/conversion math on that. * User data for 200m+ users + the ability to extend and refine * A direct line to 200m+ home screens via push notifications * Enough inertia to mitigate the threat of competition (Facebook challenged with the Poke app, that failed) * The potential to change/extend the feature set to more revenue oriented streams * All other possible things you could do with an enormous and massively engaged captive audience...e.g. walking past Starbucks - they're having a slow day. Receive Snapchat from Starbucks with scannable special offer code and super quick expiry. We've just made Groupon for the high street. * Rights to all the above until the end of time
Total: $4bn
Doesn't seem so crazy to me.
It's how the wind blows these days in "tech". It's reminiscent of a bubble with all of these mobile apps calling themselves "companies" when most aren't even profitable. It reminds of the early 2000s when "how many eyeballs do you get monthly" was the question of the day.
Does Pinterest really need $400M+ in venture to operate? What are they doing over there? Advanced robotics with neural implants? Burn rate of $30M a month?
Utter bullshit.
Like I said before, VC's aren't dumb but they're also not very smart, most at least - they don't need to be. They flock to whatever's hot and popular (trendy) and invest. Their exit strategy is simple: a highly overvalued IPO where the public market will buy based on hype or an acquisition.
These unsustainable trends in extremely overvalued companies/apps will continue for a while, unfortunately.
Until the shit hits the fan and one of these giants of venture capital infusion tank.
Unfortunately, it's so much more than an issue of Snapchat being worthless, it's a large chunk of the tech community today being generally worthless by looking for the EASY WAY OUT - building some stupid app, getting 5M+ users for a few years of engagement and raising large rounds and cashing out. There's no intrinsic value of any kind in this.
It wasn't like this before the App Store.
There is still great technology being developed out there, but most people (and human nature in general) flocks to the easy way out, the replication factor, globalization, the art of copying something, or as Peter Thiel would say" "the 1 to n of globalization."
Why does Pinterest need $400M in venture to operate? Lets ask ourselves why a glorified status feed, Twitter, needs over 100 engineers. Why does Twitter need to rewrite almost every aspect of real-time stream processing? Because there is huge value there, and at that scale I'm sure the financials look a lot different from your weekend web app.
Back to snapchat, this tech doomsday bubble, everyone is parrotting is a single lone horse in what are many successful and sustainable companies such as DropBox, Uber, RocketFuel and Square. And its not like snapchat is an imaginary app. Snapchat shares over 350M photos a day, people aren't lining up and seeing snapchat success overnight.
I'm having trouble seeing that the current tech industry is in a "bubble" when the only evidence for it is that SnapChat, with an incredibly huge userbase, is raising ~3B. For whatever reason the other 39 "unicorn" companies don't count.
In Twitter's defense, while they might not "need" 100 engineers to rewrite their code, they are certainly infinitely more than just a glorified status feed.
Twitter has allowed millions of people across the globe to share insight into what is happening in their back yard. While for us Americans, this might include the dog taking a shit on a Macbook, in the Middle East it's far different. Twitter and FB have been responsible for a lot of insight and uprisings, especially during the Arab Spring.
Additionally, Twitter is an innovation in communications. Just like Skype is, but perhaps less so or just differently. Marc Andreessen said it perfectly: "Twitter is instant global public messaging - for free." That has some value vs. pinning my dress on a pin board.
Point is - SnapChat is worthless, Pinterest is less worthless but still has little value. Sure, advertisers and brands flock to the net since their old-school TV/print models are being replaced by technology - but very few "apps" are companies/businesses. And young users, particularly teens are very prone to jump ship like fleas off a dog when the "latest and greatest" comes about. Do you see SnapChat existing in 10 years? I don't think so. Pinterest? There will be something newer. FB? Twitter? Dropbox? Yeap, they'll still be around. And probably doing better than ever.
You mention Groupon. I've knocked Groupon a lot, but it's still got a public-market-cap of $7B, more than the Google buyout offer people said they were insane to reject.
The founders are now rich.. but the company isn't.. and if they raise a next round, their true valuation will shine through...
If anything, employees selling shares probably makes it easier because it's common instead of preferred shares being sold.
* This number was taken from the article.
[Edited to fix typos.]
My main point is, Snapchat has a lot of users who have formed the habit of opening the app and sending snaps, totaling hundreds of millions of snaps/day. Simply cloning the app in no way means that you can generate those kinds of numbers. The numbers are stellar, and the investors seem to think so as well.
They might be valued higher than Genentech at this point.
Your strategy has merit, but simply making another Facebook is not going to work now (It would have back in Myspace days). Now there is not an untapped market of people - almost everyone has things vested in social media companies. 1. Companies need either to do better then Facebook (Once again Google tried. Do not get me wrong, there is a fair chance that eventually Google+ will prevail, but very few projects have full might of Google paving their success.) 2. Or have different punchline than Facebook does to attract users (This is what Snapchat did). *typoed
It'll probably die off eventually but what replaces it will probably look nothing like it and will exist in a much different climate.
all this still doesn't make it "cool" with 1B of teenagers (don't know what does - if i knew i would probably not be wasting time here :), and 1B a new Facebook would make.
There is no true social network born on mobile, and although facebook might win, I'm not sure that it's "never" going to happen
I disagree and agree. I agree there will not be another Facebook. I disagree, because Facebook is not the end of the line for social networks, just like Altavista and Inktomi were not the end of the line for search engines.
No one in the social network space has yet hit the quality Google hit with search. I fully agree that once that place is hit, it will be very, very difficult to dislodge whoever does it.
So if there was no Facebook would another Facebook clone take it's place? Intuitive answer is yes, until you start thinking. How did Facebook got so big? It was best product on the market. So now Facebook is dead, what happened to Facebook? Is there a reason it died, if Facebook could not survive, how will it clones will not only survive, but thrive?
So here I would like to make a small prediction. The only way there will be another Facebook, if someone would make something better. Something which will either do things that Facebook does better - and hence kill it off, or something that will open entire new market.
TL:DR If you want to get big you can't be another Facebook: you either must be different or better.
How many here remember sixdegrees.com? (1996) That's the first social networking site I remember signing up to...
Of course you must be "different", but the difference between each successive evolutionary step from Six Degrees to Facebook has been tiny.
While it is getting harder as the size of the successive networks have gotten bigger (SixDegrees reached a low number of million users), because of the network effects, it's not so much about features as about finding a way of building the network to a tipping point, and social networks are incredibly fickle and subsets can migrate to new services because they are not the dominant network.
People like to be unique. They don't like to be grouped in with the rest of the world. This is especially true with teenagers. You don't have to make a better Facebook, you just have to make a new Facebook. It needs that feeling of being fun and exclusive, which Facebook is quickly lacking and can never gain.
Google+ will never succeed. Yes, they've invested countless dollars and time from some of the brightest minds available, but the name Google is simply too big, and too well known. It's boring from day one, there's nothing cool or hip about signing up on Google+.
"Sources said the round being raised — up to $200 million — will come in part from China’s Internet giant Tencent and value the self-destructing mobile messaging startup from $3.6 billion to $4 billion."
I see Snapchat as a faster Youtube. It's basically content that you want to see - Youtube from the masses, Snapchat from your friends.
The Youtube advertising model is clearly fantastic. From things I've read some time in the past I know they kill it on a $/user basis vs pretty much every social site on the web.
Putting a 2 second static 'brand flash' in front of every snap would probably not put people off using the service (in the same way that people still use Youtube - even though video hosting is a highly replicable thing). And from a brands point of view 2 seconds is probably all you need to get into someone's subconscious.
Bonuses for being an app:
1) Full screen take over. 2) No distractions from other tabs. 3) I'm sure they could find out age and sex quite easily if they wanted to. So they would have - age, sex and location. POWERFUL.
The sooner the better. Explain that the app needs to make money to it's users. People get used to things.
I disagree with the "snapchat is worthless" analysis of the original article. Perhaps from the point of view of the current monetization needs and mechanisms, but my feeling is that snapchat's "ephemeral" model, like it's users, is a young and fresh approach. They will invent something new. Of course, they may also die out like so many others, but it's pointless to say the indusrty shouldn't be that way. The developers may aspire to greater goals, but the consumers still dictate what they want.
Stickers, whether it's reasonable or not, are a great way to monetize on messaging.
Snapchat also allows you to find someone to talk to that no other service does as seamlessly. From my understanding anyway, people will send out snaps to a group of people, many time everyone they're connected to and after a few snaps back and forth with one or two of the responders, they'll switch to another channel and chat. One could argue adding messaging here would increase the stickiness, but I think snapchat is right in that adding it in would just be distracting.
I'm guessing that stickers (siloed in each app) are a fad that will eventually go away.
FB went the ad route a la google and then moved towards analytics. Twitter is doing the same. If snapchat went down that route they would have to analyze the photos taken, pictures drawn etc. to provide data to customers in the same way.
Not to get too meta, but there is always value in self-expression.
One thing that bears noting is that Snapchat is closer to mobile messaging apps like WhatsApp than it is to photo sharing / social networking apps like Instagram or Facebook.
Regardless, I feel that the ephemeral nature of snapchat is likely to reduce long-term user retention. You have no tangible investment into the platform because everything is deleted.
I think that would be more private. Sever the 3rd party.
With a distributed version, you'd just have to trust all the people you're sending data to to delete it.
And that pretty much requires a party other than the recipient whose interest it is to lock down the client as much as possible to at least increase the hassle-factor in violating the senders trust.
Otherwise, if the recipient had the "EvilReplicatingToFacebook" fork of the app readily available, it'd quickly destroy any value in the app.
Snapchat offers what? Engagement
So how do you monetize that? Get users to engage with brands
Allow me to elaborate. Twitter's Amplify partnership program is a brilliant example of the amount brands are willing to pay to engage with customers (both existing and potential). Twitter used to be in a unique position to offer that engagement too: with huge penetration, easy integration into existing media (putting a hashtag in the corner of a TV broadcast, for instance), and an incredibly low-friction engagement process. Twitter made it easy for a brand to create a sea of voices engaging with a brand. I believe Snapchat is now in a position to make a similar offer.
Before I go on, I'd like to pose a question: how many people read event-centric tweets after an event? Aside from journalists reporting on said event looking for memorable tweets, my guess is not many. Hell, most people barely pay attention to the stream during these events. At most, you have a tweet that's at the top of a feed for a few seconds before being quickly pushed down by a dozen more, never to be read again. I'm sure by now you're connecting the dots: Snapchat offers a similar service in that respect.
The thing is, there's a major core difference between these two. Twitter is a public forum, and Snapchat is strictly peer-to-peer communication. This gives Snapchat a unique offering, in that it allows brands to communicate one-on-one with customers.
Imagine, if you will, a broadcast of The Walking Dead (I use them as an example for two reasons: 1.) I'm a huge fan, and 2.) They're big on the second-screen experience so this seems plausible). As part of your second-screen experience, one might find a stream of picture responses to various moments in the episode. Major character dies, suddenly the stream is full of shocked faces (maybe some rage faces or big goofy grins, depending on who). Now imagine this stream is powered by Snapchat.
This is already possible with Twitter, to a degree, but with Snapchat there's less inhibition which will drive greater participation and greater engagement. Not only that, but Snapchat would also allow TWD to engage back with the user on a personal level- maybe respond with a snap that contains a marketing call-to-action ("Want more scares? Check out the exclusive behind-the-scenes footage online"), or just responds with a zombified version of the image you sent in (how cool would that be?).
I'm sure there are many more awesome use cases than what I just stated, but I think this example speaks to the fact that Snapchat can be a real force for engagement without requiring brands to spam the hell out of the platform's users. This is where Snapchat outperforms against any other social product when it comes to driving brand engagement: because the users are so fanatically engaging with the product already, brands don't need to spam. They can just interact with the users in a meaningful or entertaining way - and I don't mean this "Get a coupon that you have 10 seconds to screenshot" bullshit, or "Let brands send snapchats that last forever" or any shit like that. Just give the users a fun way to interact with your brand, and the loyalty (and purchases) will come.
So, here's what I would do, if I were to monetize Snapchat:
- $20/yr developer program
- Free API access for up to 2,000 snaps sent/received per month
- Pay-as-you-go model: $XX for every additional 10,000 additional snaps
- Hashtag support (maybe)
- Analytics
- Offer consulting at a premium to help brands effectively leverage Snapchat
Notice the generous pricing structure. I think one thing that Snapchat can cash in on is the uniqueness of its platform, and the eagerness of the hacker community at large to build on top of it. I want you to recall the modest success of App.net, which doesn't have nearly the engagement metrics or penetration that Snapchat currently enjoys. I for one have several small projects I'd like to build on the Snapchat platform, and would be more than happy to pay a modest premium for the opportunity. The pay-as-you-go structure keeps your hackers happy (I doubt anyone would pay $100+ for toy projects), and also maximizes revenue from larger brand campaigns.
In conclusion, I think the assertion that Snapchat "has no intrinsic value" is complete bollocks.
Edit I meant private, not anonymous.
It makes you think, doesn't it?
Look up "Phantom". It's a jailbreak tweak for iOS available in Cydia.
Otherwise they could send their embarrassing pictures by plain old e-mail with a request 'please do not forward'.
Instead they place proxy-trust in Snapchat to enforce that restriction; if that trust falters, so does Snapchat.