One of the biggest headlines last week was that the free mobile app Snapchat rejected a $3 billion cash offer from Facebook Inc. (NASDAQ:FB), though neither company confirmed the report. Snapchat, which allows users to send pictures or video messages that delete just a few seconds after they're opened, has never made a profit. So why did Facebook make the offer, why did Snapchat reject it, and how much is Snapchat actually worth?
Facebook noted in its third-quarter earnings that it had noticed a slight decrease in daily usage among teenagers. Meanwhile, mobile messaging apps like Snapchat and WhatsApp continue to explode in popularity among teens around the world.
Facebook has long known about the threat of these mobile messaging apps. The social network recently put a heavier emphasis on its Messenger app, but Facebook also released an app at the end of 2012 that many saw as a direct response to the growing popularity of Snapchat.
Named Poke, the mobile app allowed users to send pictures and videos to friends that automatically delete after a set amount of time, just like Snapchat.
Unlike Snapchat, Poke quickly fell out of favor. After climbing to the top of the app-download charts, Poke fell out of the top 25 by mid-March. According to Mashable, it is now ranked around 300 while Snapchat remains one of the most-downloaded apps.
Facebook clearly saw the value in Snapchat’s feature but recognized that its own app just didn’t resonate with users.
It’s therefore not surprising that Facebook wanted to purchase Snapchat, but $3 billion would have made it Facebook’s most expensive acquisition to date. It paid only $1 billion for Instagram, an app that has far more users and makes more sense as an advertising platform.
So why did Snapchat say no to such a generous offer? Snapchat CEO Evan Spiegel clearly thinks his app has room to grow, and he isn’t alone. Chinese e-commerce company Tencent Holdings is reportedly looking to invest $200 million in Snapchat, which would value the app at $4 billion.
There’s also the matter of the Twitter Inc. (NYSE:TWTR) IPO, which raised about $29 billion for the company. While Twitter has a much larger user base and has been used by advertisers for a while, it has never turned a profit. With that knowledge and the fact that the climate for tech IPOs seems to be favorable, Spiegel may believe that his company could make much more than $3 billion by going public.
So the real question is what Snapchat is actually worth, and whether rejecting Facebook was the right move.
As Venture Beat points out, it seems Snapchat's value derives from the fact that older social networks like Facebook have ceased to be cool to teenagers, and Snapchat is ready to take over. But it’s only a matter of time before a new app replaces Snapchat as the cool new thing. Snapchat’s own logic seems to dictate that it should have taken the money and run.
There is also the flawed logic in believing that everything teens find cool will eventually be used ubiquitously by older people. Facebook, for example, was intended to be a more useful tool for college stands than the teenager-dominated MySpace. Additionally, teenagers tend to be better at picking fads than lasting phenomena.
“No one who’s older than 18, for instance, believes One Direction is the future of music,” wrote the Wall Street Times’ Farhad Manjoo. “That brings us back to Snapchat. Is the app just a youth far, just another boy band, or is it something more permanent; is it the Beatles?”
At least one investor thinks that for mobile advertising, Snapchat can be the Beatles. While Facebook, Instagram and Twitter insert advertisements into users’ feeds that can quickly flicked away, Snapchat requires users to press and hold the screen to see an image.
It’s this added step of engagement that advertisers crave. If a user is holding their thumb to the screen, it’s almost guaranteed that their eyes are looking as well. It could be the perfect time to deliver an ad.
Users are sharing as many as 350 million photos on Snapchat every day, and have to hold their thumb and stare at the screen for several seconds each time. It’s a potential gold mine for marketers, and it’s the reason investors see Snapchat as more than just a big pool of teenager users.
Spiegel said that he doesn’t want to put advertisements into Snapchat, but the company is going to have to generate revenue eventually. If done correctly, it could either become the best new tool for advertisers, or less cool than Facebook.
What do you think about the future of Snapchat? Do you think Snapchat should have accepted the offer from Facebook? Let us know in the comments.
Originally from Northern California, Ryan W. Neal came to New York to earn his master's in journalism from Columbia University. He joined IB Times April 2013, and is a writer...