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Putting Snapchat in context

Snapchat

Snapchat shows that people are getting concerned about privacy

The internet industry has been abuzz with the rumor that snapchat, the hot app that allows anyone to take pictures and videos that expire after a limited time period, rebuffed a $3 billion offer for acquisition by Facebook.

While billion dollar offers in the consumer internet space are relatively rare, we can still look the roughly 20 deals that have been put forward into that space in order to get a sense of what those kinds of valuations can entail. This allows us to put Snapchat in a wider context and get a better understanding as to their decision.

But first, let’s take a look at the list of consumer internet companies that have been rumored or completed acquisitions in the greater than $1 billion range:

 

Company Offering party Price Result Year company founded Year offered was made Current value (in billion)
Facebook Yahoo $1B Declined 2004 2006 $120B
Instagram Facebook $1B Acquired 2010 2012
Tumblr Yahoo $1.1B Acquired 2007 2013
Mapquest AOL $1.1B Acquired 1996 2000
Waze Google $1.1B Acquired 2008 2013
Paypal Ebay $1.5B Acquired 1998 2002
YouTube Google $1.6B Acquired 2005 2006
Facebook Viacom $2B Declined 2004 2007 $120B
Skype Ebay $2.4B Acquired 2003 2005 Resold for $2.75B
Rovio Zynga $2.5B Declined 2005 2011 $9B (rumored)
GroupOn Yahoo $3.6B Declined 2008 2010 $7.5B
Snapchat Facebook $3B Declined 2011 2013 $4B (rumored)
Geocities Yahoo $3.6B Acquired 1996 1999 $0 (Dead)
Netscape AOL $4.2B Acquired 1994 1998 $0 (Dead)
Broadcast.com Yahoo $5.7B Acquired 1995 1999 $0 (Dead)
Groupon Google $6B Declined 2008 2010 $7.5B
Twitter Google $8B Declined 2006 2010 $24B
Skype Microsoft $8.5B Acquired 2003 2011 In 2009, the company had been valued at $2.75B
Twitter Facebook $10B Declined 2006 2011 $24B
Facebook Google $15B Declined 2004 2008 $120B
Yahoo Microsoft $44B Declined 1994 2008 $36B

Looking at this graph, the first thing that becomes clear is that Snapchat’s chances of getting other offers are getting limited. This points to the company having a strong belief that it can be the social network of the future and trump the likes of Twitter and Facebook at their own games. At this high a valuation, the number of potential acquirers becomes limited: Facebook may still try and Google and Microsoft would be among the few other US based companies which could play here. Tencent and Alibaba seem like the only other potential suitors for an acquisition on a global basis.

At this point, the company is 2 years old. By way of comparison, Facebook was 2 years old when Yahoo attempted to acquired, as was Instagram when Facebook picked it up. Skype was 2 too when Ebay bought it for $2.75B and GroupOn rebuffed a $3.6 billion offer from Yahoo and a $6 billion one from Google in its second year of business; So one could argue that snapchat has a lot of upside potential as it is still a relatively new business that is being valued at a much higher rate than other companies at this point in its evolution. Whether that translates into sustained growth over longer period is yet to be debated but it seems clear that we will hear about another offer at a higher valuation for the company within the next 12 months.

Their path to success, however, becomes a little more complicated. If the company wants to offer liquidity to its investors, it will have to find a way to either increase the value at which it is acquired or start generating substantial revenue and complete a public offering. If it were to chart a course similar to Twitter’s, snapchat would have to essentially triple its worth over the next couple of years and then double it again over the next two. This would set its value at somewhere around $9 billion by 2015 or a potential IPO of around $18 billion by 2017.

However, success on those courses are relatively rare. Witness, for example, Groupon. The company turned down a $6 billion acquisition offer from Google in 2010, two years into its business life; 3 years later, as a public company, it is thought to be worth around $7.5 billion. Meanwhile, acquired darlings of the 1990s like Geocities (acquired by Yahoo for $3.6B in 1999), Netscape (acquired for $4.2B by AOL in 1998), and Broadcast.com (acquired for $5.7 billion by Yah00)  all ended up being closed up. And in 2008, Yahoo rebuffed a $44B acquisition from Microsoft; today, its market capitalization sits at around $36B.

Of course, Snapchat may pin its hopes on becoming either Skype, Twitter, or Facebook. Skype was acquired for $8.5B by Microsoft, a price higher than what Microsoft paid for Nokia; Facebook and Twitter have taken their hopes and turned into rich advertising-based public companies with market caps that sit several multiples higher than the acquisition offers they received. Interestingly, Snapchat has a number of similar characteristics in common with those offerings:

  • It’s about communication: Skype, Facebook, and Twitter built their business on facilitating communication between individuals. Snapchat is doing the same by taken a mode of communication that had changed (moving from one on one text and audio chat over Skype to publicly open chats on Facebook and Twitter and taking them back to a more private realm).
  • It’s mobile: Snapchat exists only in the mobile space, a place that is hot. By comparison, with the exception of Instagram and Rovio, all the other companies that ended up in the billion-plus acquisition club had background in the PC space. Because all the giant players (Twitter, Facebook, Google, Microsoft, Yahoo) need a stronger footprint in the space, they may be willing to pay a premium.
  • It taps into some dissatisfaction with the current model: Facebook’s and Twitter default open model to privacy seems to worry an increasing portion of the market. By offering self-destructing messages, snapchat may present a solution to the social media conundrum of “do I share or do I worry about my digital footprint”.

Today, though, Snapchat sits in a very gray area. At $3B, it sits on the high end of potential offers. So your view on whether the company was right to accept the deal or not ties into your expectations as to whether it can become the next Twitter or Facebook. If you believe that’s the case, then the $3 billion valuation was low; otherwise, it is high. And considering recent rumors that Google had offered $4 billion, it’s unclear how far up the sticker price could go.

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