How Does Snapchat Make Money: Snapcash and Disappearing Ads
In the beginning, social media sites like Facebook, Inc. (NASDAQ/FB) were more of a passing curiosity than anything. What does my ex-girlfriend look like now? Where does my old roommate that I no longer bother keeping in touch with work? But in just a few short years, social media has evolved from a voyeuristic portal into the world’s most important marketing channel—and a key area of interest for investors. Since Facebook went public in 2012, social media outlets have been looking for ways to make some money and generate investor interest. And the latest social media stock drumming up press is Snapchat.
One of the world’s most popular mobile apps, Snapchat isn’t publicly traded yet, but recent moves suggest an initial public offering (IPO) isn’t that far off. With this in mind, investors want to know how Snapchat actually makes money.
I’ll address that question in a moment, but first, what services does Snapchat offer and why is it getting so much attention?
Snapchat’s Services and User Base
Snapchat first launched in 2011. It was the first mobile app to offer a vanishing message feature. The app lets users share photos, videos, and texts that disappear after they have been viewed for a specific amount of time, between three and 10 seconds, which is determined by the sender. Today, Snapchat’s 200 million active monthly users send 700 million disappearing “snaps” every day.(1)
Who’s Snapchatting? Next to Facebook and Instagram, Snapchat is the third most popular social network among millennials (those born between the early 1980s and early 2000s), capturing 32.9% of the market.(2) Snapchat is also the most popular social network among the highly coveted college-aged demographic. Roughly 70% of college students say they send out a Snapchat at least once a day, compared to just 11% that post on Facebook with the same frequency.(3)
Snapchat Takes Important Steps to IPO
The company’s rapidly growing user base represents a huge opportunity for brands and marketers. That is why the company was able to raise nearly half a billion dollars ($485.63 million) from 23 investors, bringing the company’s total publicly disclosed fundraising to $648 million.(4) It has also secured a valuation of $10.0–$20.0 billion.
This might also explain why it was able to woo well-known Credit Suisse banker and Internet stock analyst Imran Khan to serve as the company’s new chief strategy officer. While at Credit Suisse, Khan was instrumental in helping the bank win roles advising on the IPOs of Alibaba Group Holding Limited (NYSE/BABA), Jumei International Holding Limited (NYSE/JMEI), and Weibo Corporation (NASDAQ/WB).
Snapchat’s strengthened management team should help it turn the corner from being simply a revenue-generating brand into a highly profitable one.
How Snapchat Makes Money
Recently, Snapchat announced two interesting revenue-generating streams.
On November 17, it launched “Snapcash,” adding the feature to its app through a deal with Square Cash. With Snapcash, users can add a debit card to their Snapchat account, type in a dollar amount, and send money to friends.(5)
Earlier in the year on October 17, Snapchat announced that it was starting to place paid advertising in its app. The ads appear in the recent updates part of the app and they disappear once they’ve been viewed or in 24 hours. Unlike other social media platforms that hit you with online advertising, users can choose whether or not to watch the ads. According to Snapchat, the ads are not targeted through collected user data.
It didn’t take long for heavy hitters to step up to the proverbial plate. Amazon.com, Inc. (NASDAQ/AMZN) and Hollister Co. (owned by Abercrombie & Fitch Co. [NYSE/ANF]) sponsored a Black Friday-themed montage of images and videos. Electronic Arts Inc. (NASDAQ/EA) ran a 20-second video ad for its new videogame Dragon Age: Inquisition. Universal Studios (owned by Comcast Corporation [NASDAQ/CMCSA]) jumped on board with a 20-second trailer promoting the horror film Ouija and the knee-slapper Dumb and Dumber To. In the beginning of 2015, McDonalds Corporation (NYSE/MCD) rolled out a 15-second sponsored ad.
To help attract even more users and advertisers, Snapchat has indicated it will be expanding its services, providing users with news, television, movie clips, and so forth. In keeping with the Snapchat philosophy, the content will vanish once it’s been viewed.
Where will the content come from? Yahoo! Inc. (NASDAQ/YHOO) invested as much as $20.0 million into Snapchat.(6) Perhaps Yahoo! is hoping to repeat its Alibaba investing success or perhaps it’s hoping to get its foot in the door for new ways to distribute content, apps, and ads to mobile users.
With the start of consistent revenue streams in place, half a billion newly minted dollars in the bank, and a stronger management team, Snapchat has everything it needs to continue growing its user base, monetizing its services, and ushering in its IPO…or buyout.