Why Snapchat is screwed
Last week, Business Insider chief Henry Blodget wrote a post titled, "EXCLUSIVE: How Snapchat Plans To Make Money." With a juicy title like that, one couldn't help but click.
The disappearing MMS app, Snapchat, is as hot as a startup can be right now. Recent reports say its board turned down a $3 billion buyout offer from Facebook, even though Snapchat makes no money. The news has caused a flurry of speculation -- what does Snapchat know that we don't know? -- and hungry social media consultants and marketers are eagerly pointing to it as evidence that you should spend money on this, guys!
The fact remains: Snapchat itself doesn't make money. Facebook bid the $3b on it in order to eliminate the threat of a future competitor, not because it's a promising revenue source. Turning Zuck's money down means Snapchat's founders need to inch toward a real business or generate a real asset (like Twitter has), before the hype bubble pops.
I think they're screwed. Snapchat, I predict, will be the next Formspring or Chatroulette, that mega-hot thing that all the kids were on until suddenly they weren't.
Enter Henry Blodget, with the low-down on Snapchat's real revenue opportunity.
What could Mr. Blodget's "exclusive" info be? Thirty-one paragraphs into the post, he tells us.
Drumroll, please. . .
Take a minute to let that sink in. I know, it's a shocking idea, but leave it to a couple of twenty-year-old social network tycoons to think outside of the box and turn the business world on its head with... ads.
In Blodget's defense, he also suggested Snapchat could make money selling virtual goods, or upgraded digital trinkets you can send your friends via exploding text. Side note: virtual goods are the #1 way most game apps make money, so that's an obvious idea, too. However, few sustainable businesses of more than a dozen or so employees has been built on virtual goods. (Zynga, the most notable example of a virtual goods business, is in the stock market toilet.)
[UPDATE: As commenters have pointed out, Supercell is a huge company built on virtual goods. The jury is still out on whether it's built a sustainable business, but it is a good business so far. And Shenzhen-based Tencent, whose games make money from virtual goods, among other things, is massive. But certainly no Western business has proven the model works sustainably outside of games. Thanks everyone, for the comments!]
Those two revenue models are not likely to uphold a $3 billion+ business in any sustainable way, without additional value generation of some sort.
As The New Yorker's Matt Buchanan pointed out, the reason Snapchat turned the money down is because its backers think it's going to be worth more than $3b in the future. They don't want another Instagram, which is now largely accepted as worth more than the $1 billion Facebook spent on it. I'll go a step further and suggest that maybe Snapchat's early shareholders gave up voting control on their board of directors when they took $20 million off the table in secondary shares this summer, and that the new investors are now the ones making the call not to sell while they can.
Or maybe they all really think they have a business opportunity. They have certainly built a cool product. But I'll contend that Snapchat's team missed its opportunity to make money by not taking the money, and that their business is ultimately doomed for the following reasons:
1) Snapchat's key feature is exactly the reason it can't become a business.
The core value of Snapchat is the messages one sends disappear into the ether. There's no data trail. Unfortunately, that means that there's nothing to lock users in the more they use it. Facebook, for example, is full of frustrated users who want to leave but keep an account because all their photos are there, all their conversations are there, and "what if someone needs to contact me?"
Snapchat, on the other hand, uses your existing address book on your phone. Your network is not locked up in the app. You can quit Snapchat tomorrow and still have your network. And your history of photos and conversations and data? The point of Snapchat is they're not there.
Not good if Snapchat's going to try to keep people around and "monetize" them.
2) Snapchat's technology is easy to replicate.
Exploding messages was novel when Snapchat came out, but the team isn't breaking new ground tech-wise. I think the "impermanence" of data concept Snapchat brought to collective attention is going to be important to the future of communication and the Web, but an exact replica of Snapchat's actual tech could be built by a couple of coders in a weekend. (Yes, Snapchat now has tons of servers and data-handling issues that require a lot of technical expertise, but again, we're not reinventing the wheel.)
That's a problem, because...
3) When Snapchat introduces ads, users will flee.
One thing the young generation that uses Snapchat is real adept at is avoiding advertising. Savvy web and mobile users, in general, are good at that. That is, coincidentally, why there's a huge movement in digital marketing away from brands serving banner ads and toward brands telling stories -- content marketing.
Face it: kids don't like ads. As soon as Snapchat users start getting Snaps from Ford Focus and Citibank, they're going to start thinking Snapchat's about as cool as junk mail. The word they're going to use is Spam.
I ran a calculation that if Snapchat ran one ad per Snap sent (400 million Snaps a day), at the current rate and the typical mobile ad rate ($1 CPM on the high end), the company could make $146 million a year in revenue. If it grows to a billion Snaps per day, it could generate $300 million. So 10x revenue for an ad-based business is insane, but not for a social network. But that would mean these kids who send 150 snaps per day would get 150 ads per day. And that is when users quit.
Sure, some advertisers will come up with really funny ads that won't bother users; they'll try to fit the medium. But it's going to ruin the user experience, and the users don't have a good reason to deal with bad UX.
(When that happens, I'm launching "Shanechat." It will be ad-free forever, and all the cool kids will come in droves! Although, a dozen other app-makers will probably beat me to it.)
Everyone's hyped about Snapchat because all the kids are on it. Adults don't understand it in the way they don't understand why kids would spend so much time playing Grand Theft Auto. That doesn't mean it's not a business. It's not a business because the only thing it has going for it is user growth, but that user growth is not generating any sustainable assets or lock-in. And "Well, you fusty adults don't understand it!" is not a good answer to, "How will you make money?"
Look, it may be easy to build an app, but it's hard to build a business. The Snapchat team is certainly working hard to create something that has an impact, and they're betting that they can be the next big thing. If they pull it off, it will be against serious odds and naysayers like me, and kudos to them. But if I were a betting man, I would put all my chips in against them.
Snapchat-backers and marketers may hate to hear this. But their comments will disappear after 5 seconds.