Behind Snapchat’s Decision: The New Native Ad Platform.

By Posted in - Product Strategy on February 26th, 2014

When Snapchat, the ephemeral-photo messaging app, turned down a $3 billion dollar buyout offer from Facebook late 2013, CEO Evan Spiegel was lambasted.

             “Snapchat is a feature not a company. Their investors should realize this and take the money and move on. It is a great return.”

“Snapchat’s $3B valuation will disappear just like their messages.”

“That was a mistake. I’d have sold that puppy quick. Things get old fast and after all these years Facebook is starting to fall out in popularity as will Snapchat one day.”

We’ve heard the story before. Some (usually tech) start-up is evaluated for an exorbitant amount of money as their popularity surges (MySpace, Groupon, etc.), but, whether it’s due to mismanagement or a fickle market, investors are left starved, as the seeds in which they placed their money bear no fruit.
In a sense, Snapchat bears a superficial resemblance to the digital giants which preceded it: lots of people use it, most of them even enjoy it, but none of them are paying for it. So when a buyout stands to land Spiegel $750 million dollars in cash, common wisdom clamors: “Take the money!” But Spiegel resisted, saying “There are very few people in the world who get to build a business like this…I think trading that for some short-term gain isn’t very interesting.” It’s clear Spiegel has an aim higher than a quick cash-out, but unlike some, I doubt it’s one motivated entirely by pride.

While Spiegel’s decision not to sell may seem like brazen, youthful folly, the young CEO’s judgment is probably more strategic than one initially assumes. To understand Spiegel’s refusal, perhaps its better to ask not why Spiegel would turn down such a generous offer, but why would Facebook make such an offer in the first place.

About 15 months ago, when Snapchat was beginning to gain traction, Spiegel and his business partner, Bobby Murphy, met with Zuckerberg in Spiegel’s hometown of Los Angeles. The Facebook founder hoped to glimpse the direction the two twenty-somethings planned for their burgeoning application, but when they remained tight-lipped, Zuckerberg threatened the two upstarts with news of Facebook’s competing app, Poke. However, within 4 days of its release, Poke fell out of the top 30 downloaded applications, and as of this writing, rests comfortably in obscurity somewhere in the 1000s range. 1

When Facebook’s sabre rattling failed to intimidate, Zuckerberg tried to buy them out, and well, we know how that story goes. But why go through so much trouble? Because Facebook isn’t cool, is why.

                  We believe that some of our users, particularly our younger users, are aware of actively engaging with other products and services similar to or as substitute for, Facebook. For example, we believe that some of our users have reduced their engagement with Facebook in favor of increased engagement with other products and services such as Instagram.

                                                                                                  Facebook 10-K Report for 2012

In 2012 the average Facebook user was 41 years old, up from 38 years old in 2010. Considering Snapchat’s median age is 18, Facebook’s motivations begin to materialize: Zuckerberg wants to reclaim straying youngsters into the Facebook fold, leveraging their information in an effort to make advertising on the social network more attractive.

Snapchat has a unique position in the digital milieu. In light of the Snowden leaks, our culture covets security, and Snapchat’s “burn after reading”-style messaging services assuage young adult fears of their private lives being permanently evidenced on Facebook and its ilk. Provided Snapchat keeps grasp on its userbase, Spiegel has the potential for a highly lucrative enterprise. Over 77 percent of college students are using Snapchat daily. 45 percent of students age 18-24 would open a snap from a brand they didn’t know, while 73 percent would open a snap from a brand they did know. Suddenly, the revenue-less app seems like a major player as a native advertising platform. We’ve already seen the success of DoSomething’s Valentine’s Day campaign, which saw an 11 percent response to the call of action it placed in a Snapchat story. Other brands experimenting with Snapchat include Taco Bell, KarmaLoop, GrubHub, and recently McDonald’s.

The interest and the infrastructure are there. Provided Snapchat can successfully integrate advertisements without comprising user experience, I doubt Spiegel will regret his decision to keep his company.

1. http://www.forbes.com/sites/jjcolao/2014/01/06/the-inside-story-of-snapchat-the-worlds-hottest-app-or-a-3-billion-disappearing-act/