How Snapchat Makes Money

As the final project for a product design class at Stanford in 2011, Evan Spiegel pitched the idea for a mobile app that permanently deletes photos and texts after opening them. His classmates balked and thought it was a terrible idea. Seven years later, Snapchat – the company's official name is Snap Inc.(SNAP) – had become one of the hottest social media apps, the kind that feels comfortable turning down a $3 billion offer from Facebook Inc. (FB).

The company went public with a market cap of $24 billion in March 2017, significantly more than Twitter's market cap, which was at $11 billion at the time. The price of the stock soared to $24 per share and pushed its market cap to $33 billion on the day after its IPO. After the IPO, Mr. Spiegel received stock rewards of more than 37 million shares of Snap stock, worth around $640 million at the time, which granted him the best-paid CEO of 2017.

In August 2016, Facebook-owned (FB) Instagram debuted its "Instagram Stories" feature, a direct response to Snap Inc.'s "Snapchat Stories." In 2017, RBC Capital Markets reported that 79% of the teen cohort (13-18 years old) used Snapchat, compared to 73% for Instagram. As Instagram's newest feature has had time to saturate, however, the Snapchat rival has attracted more and more of Snap Inc.'s customers. In May of 2018, 69% of teens (13-17 years old) in the US reported that they had a Snapchat account, compared to 72% for Instagram (72%).

Snapchat Inc. has a market cap of $8.98 billion as of October 25, 2018, roughly a third of the company's value when it went public in March 2017

Before it went public in March 2017, few believed that Snapchat was profitable. Outside a small circle of venture capital investors, the startup's financials were anyone's guess. Gawker published a leaked income statement for the 11 months prior to November 2014, which showed the company generated little revenue: just $3.1 million, while the bottom line stood at -$128.4 million. Its balance sheet as of the end of November 2014 was more promising: it showed the company with $320.6 million in cash and equivalents.

Things change quickly in Silicon Valley. Re/code reported that Snapchat was aiming for revenues of $300-$350 million in 2016, having hit a $100 million revenue run rate the previous October. Where exactly these revenues were coming from wasn't clear since Snapchat had not gone public at that time, which made Snapchat a risky investment. According to an unnamed executive quoted in Digiday, Snapchat is "a black hole of nothingness" when it comes to disclosing performance metrics that advertisers crave.

Because of Snapchat's demonstrated appeal to the coveted 18- to 34-year-old demographic, advertisers will probably continue to line up. According to a May 31, 2018 study by the Pew Research Center, 69% of teens (13-17 years old) in the US have a Snapchat account, surpassed by Youtube (85%) and Instagram (72%), but still ahead of Facebook (51%) and Twitter (32%). The company generated its revenue primarily through the sale of its advertising products, which accounted for 97% of its total revenue in 2017, according to its 2017 annual report.  

Snapchat offers brands different options for gaining exposure to young impulse-buyers. Geofilters are set to display branded images when the user is within the vicinity of a certain location. Fries might pour out over a user's head when they stray within range of a McDonald's Corp. (MCD) location, for example. Sponsored Lenses allow users to play with an image that a brand has created. You can raise your eyebrows to turn your head into a taco, for example, and then forward the interactive lens to a friend.

In January 2015, Snapchat introduced its "Discover" feature, allowing media partners such as CNN and ESPN to publish content in the form of a "story," a series of snaps that began as a purely user-generated feature (see below). Re/code reported the following March that Snapchat was charging these partners around $100 per thousand views (CPM). Snapchat took 30% of the ad revenue, if the media company sold the ad space, or 50% if Snapchat sold it.

A year and a half later, Snapchat appears to want to change up the terms. Re/code reported in October that the company wants to pay content partners upfront license fees, sell all ads on its own and keep all the resulting revenue. Presumably, the change in tack means advertisers are buying, though it's uncertain whether Snapchat will be able to renegotiate with publishers on exactly those terms. Some have speculated that Snapchat will consider offering in-app purchases, which its sometimes-profitable Japanese rival Line Corp. (LN), has had success with.

In October 2018, Snapchat expanded its video content with "Snap Originals," a series of five-minute videos available through the app's Discover feature. The in-app videos are created exclusively for Snapchat and are produced by media industry veterans like the Duplass Brothers, the creators of Riverdale, and Viacom. Snap's investors reacted negatively to the company's decision to invest in original content. The stock fell 6% to a record low of $6.59 on October 10, although the decline was likely worsened by a market-wide sell-off in the tech industry that week.

Snapchat allows users to send and receive texts, photos and videos,  known as "snaps," among fellow users of the app. A user can choose to add a series of snaps to a "story," which is publicly viewable by anyone following that user. Alternatively, users can choose to privately send snaps directly to other users.

Unlike most other messaging apps, Snapchat deletes private snaps immediately after they're opened and public snaps 24 hours after they're posted. If your friend sends you a two-second snap, and for whatever reason, you accidentally open it or miss the snap while it's being displayed, then it's gone, although as a Federal Trade Commission settlement from the end of 2014 shows, the snaps are not permanently deleted or entirely inaccessible to third parties.

In November 2017, Snapchat re-designed the user interface, separating the social from the media, which caused much confusion among the users and a petition against the re-design.