I have been working out some numbers which contain the current valuation of Snapchat for Facebook since as you might know, Instagram which is part of Facebook introduced one main feature adding “Stories” to the interface which is a direct copy of Snapchats main service. This addition is a reaction to Evan Spiegel´s rejection of Facebook´s 3Bln. offer to buy Snapchat in 2013. The upgrade of Instagram is in my opinion a main game changer for the valuation of Snapchat and I personally also think that Spiegel was betting to high while turning Zuckerberg´s offer down. But lets take a look at some numbers before making any assumptions.
Viewing this chart its clear that Instagram is more than twice as big when it comes to the pure user base. Nevertheless Snapchat contains more content which is published not only in absolute numbers but furthermore on a per user basis (3,8 vs. 0,14). This might be a reason why people who deal with this topic might conclude that Snapchat is more valuable in terms of content production. I think this is the wrong way viewing those numbers. Actually this behaviour is just an Indicator for the different nature of Snapchat and Instagram. Comparing Whats App to those two services there are significant similarities between Whats App and Snapchat when it comes to publishing numbers even though Whats App is with 1Bln. users almost five times bigger than Snapchat. Instagram is used as a platform for sharing experiences and furthermore creating a digital photo album of the user´s life while Snapchat´s main purpose is to peer to peer communication. Inserting this two services in a life cycle model its clear that Instagram is in a far more mature stage than Snapchat if comparing the growth rates. This is another reason why I believe that Snapchat´s value will decrease once Snapchat will hit the size of Instagram. My main argument for this assumption is the decreasing “Upload per Day per User” number which will decline with a growing user base not using Snapchat in such huge extend as the early adopters did.
Two more charts are describing the actual acquisition details on the Instagram deal from 2012 and the latest Snapchat market price based on Zuckerbergs offer. The left chart displays the additional value the sellers would have generated while holding the whole Facebook shares package till today. Snapchat was a 100% cash offer and therefore as a target way more important to Zuckerberg even though he did not get it. The chart on the right is a freeze screen of the price movement not only user based, but also upload based on the deal offers in 2012 and 2013 respectively and paired with todays user and upload structure to receive an overview how the firms “key assets” would change in relation to the market price. (We have only one market price for Snapchat and this is why I was forced to leave historical market price constant and play around with uploads and users.)
I believe that this chart is the most important one to have a clue about how to value Instagram and Snapchat correctly and accordingly to their nature of service. First of all its clear that a growing user base declines both, the price per upload and price per user in a steady way. Far more interesting is the fact that Snapchat is valued not for the content it provides but for the sheer amount of content which is created, while the reason Instagram is valued for can be broken down to the quality of content. The most obvious numbers which enhance my argument at this point is the change in % in the second row. While the price for Snapchat halved since the offer from Zuckerberg, Instagram´s content price declined only be 27%. Taking the third row into consideration I would even allege that Snapchat´s content is not only loosing in value but Snapchat is producing spam in comparison to Instagram. For each photo posted on Instagram there are 10,86 posted on Snapchat. Think about your reaction receiving not only one newspaper a day but 11 instead. How would you value the content and more important which one would have more quality to you?
First of all I would like to admit that it was not possible for me to find any market size statistics through all the years beginning in 2011. My idea was actually to calculate the relative premium Facebook was paying for each acquisition in relation to the increase in monopolistic power they were receiving out of an acquisition. But yeah, missing data is missing data so I tried a work around. First of all the numbers in the chart are not representative for users as a sum since double counts are not taken under consideration. Therefore the most people who have Facebook do also use the Messenger and probably also Whats App. Its not only about having a service but of course also the extend of usage but I might even suggest that calculating with 50% out of the 3.990.000.000 Facebook might theoretically cover is to optimistic. Nevertheless I am trying to give you an idea about something different with this chart. The percentages on the right side give the increase of users Facebook received while acquiring the company (in todays numbers to show the recent importance of the deal). Obviously the decisive deal Facebook did was buying the monopolistic position acquiring Whats App. This was actually a justification for the 20Bln. Zuckerberg paid to be by far the biggest player in the market. In my opinion the gap to any other company became so big that Facebook will stay what Google is for search engines or the Amazon for online sales. Coming back to our topic, the acquisition of Snapchat when it comes to buying users to grow Facebook´s base can not be reasonable for more than 3Bln. From my point of view even the 3Bln. are to much since there is no serious monopolistic increase Facebook will obtain, Facebook does already have a service (Whats App) which has similar user behaviour as Snapchat and owning Instagram, Zuckerberg has a Photo platform which provides content with a higher quality and incorporating already Snapchats biggest feature (“Stories”).
Would I pay 3Bln. for Snapchat? No.
Should Facebook pay 3Bln. for Snapchat? Probably yes but only because of their monopolistic position.
Should any other social media company pay 3Bln. for Snapchat? No.
Is there any other alternative to Snapchat? Probably Tumblr if Zuckerberg is interested in growing the user base.
What would I recommend Spiegel to do? Sell Snapchat as fast as possible. The 15Bln. valuation I read about is bullshit which will burst out of this unicorn faster than we can imagine if markets will be pressured, since there is no operating valuation for Snapchat which will reinforce this numbers.
What is Snapchat biggest downside? Despite the fact that there is not a serious operating model yet, Snapchat is a trend without any possibilities to defend their service due to the simplicity the App is about. Snapchat´s market has no protection against new competitors.
I Wrote a 12000 words work about M&A so I do have some background I can argue with and yeah I told seven months ago that Yahoo will have big trouble independently how many users they will acquire. If there is no working operating model, you can have 7Bln. users and 0 Cash. Oh wait? Yahoo… ye just google it or probably just search of Verizon ;)