Not that long ago, Snapchat turned down a massive $3-billion acquisition offer from Facebook, and almost everyone thought the company had lost its mind. Now, the startup is reportedly raising money in a financing round that will value it at a staggering $19 billion. Is there anything that could justify putting that kind of market value on a company that is only four years old and has almost no revenue?
Technology analyst Ben Thompson thinks there is — and it’s more than just the fact that Snapchat has a huge audience of millennials and younger users, although that’s clearly part of it. Thompson argues in a recent post at his Stratechery blog that one of Snapchat’s strengths is somewhat counter-intuitive: Namely, the fact that its model is a lot more like television than it is anything else.
“Mark Zuckerberg, earlier than just about anyone, clearly saw just how much money is going to be made on mobile. And, rumor has it, Snapchat’s investors completely agree: Bloomberg reports the company will soon be valued at $19 billion. To understand why you need to look not at other social networks, but rather TV.”
I confess that I found this idea jarring at first. How could a brand new mobile app that offers disappearing messages be anything like the massive market that is the conventional television business? But Thompson makes an interesting case, and one that supports the idea that Snapchat’s revenue from advertising — if it is handled properly, of course — could be substantially more than most are expecting.
This argument rests on the idea that television is being disrupted, but not just because younger viewers are cutting the cord and streaming more video through other means (something Thompson doesn’t believe is quite as widespread as many analysts assume, thanks to cable’s lock on things like sporting events, etc.). From a revenue perspective, the real disruption is that advertising is increasingly moving away from TV, and one of the places it is going in search of new viewers is mobile.
Old media ad model
So what makes Snapchat so appealing? One thing is that its media model — at least what we have seen so far, with the new feature Discover — is relatively old-fashioned: instead of just having a bunch of user-generated content and then some native advertising mixed in, the way Twitter and Facebook do, Snapchat offers a selection of content created by a handful of media partners like CNN and Vice.
It’s true that this content is made up of short video clips and in some cases deals with unusual topics, but one of the surprising things about Discover is just how traditional it is: A lot of it is news organizations talking about the weather or ISIS or whatever is in the news — and best of all, because of the way that Snapchat works, users have to hold their finger down the whole time they are watching it. This means advertisers know for a fact that someone actually sat through their entire ad.
“Here is what Snapchat offers: Nearly 200 million monthly active users, including greater than 50% penetration among users 18-24 (33% among users 18-34), and those numbers continue to grow rapidly. Very immersive ads that can only be viewed by holding your finger on the screen; brands can have a very high confidence their message is being viewed.”
The new couch potato
Thompson offers a quote from Slate TV critic Willa Paskin that puts it well: Snapchat channels, she says, “are a throwback to the couch potato mode of passive consumption,” with stories selected for you by Cosmo, CNN, etc. All of that is available on the web as well, but using Snapchat makes it even easier because it’s in one place: “You don’t have to search for anything, click on anything, seek out anything. It has already been picked out for you. Everywhere you and your phone are has become the proverbial couch.”
Obviously, Snapchat is not alone in this market. There are other video players who are a major force in mobile video, or getting there, including YouTube and things like Amazon Prime Video. And Facebook is not just going to sit around and watch Snapchat take over a market like that — which is why some are talking about (or perhaps hoping for) another WhatsApp-style $20-billion acquisition offer for Snapchat.
I’m also not as convinced as Thompson is that the lack of information on Snapchat’s viewers (apart from them being young) is going to work for a majority of big-brand advertisers. Thompson argues that this makes Snapchat more like TV, where figuring out who is actually watching your content is a game of smoke and mirrors — and that’s true. But in a world where Facebook can offer hyper-targeting of individual users based on a vast range of demographic and interest-based vectors, is a mass-media style offering of undifferentiated users really that appealing?
Thompson’s main point, however, seems unassailable: advertising is moving away from traditional television — in part because the audience is moving, but also because TV is becoming more about subscription-based models rather than advertising — and that money is going to have to go somewhere. And one of the places it is going is definitely mobile. Whether that means Snapchat is worth $19 billion or not remains a rather large question mark.