The Snapchat-Bubble: Why it is not Twitter and Kylie Jenner, but Capitalism that Creates Stock Market Volatilities.
Media report that after Kylie Jenner had tweeted to her 24 million followers that she does not “open Snapchat anymore”, the company’s stock market value dropped by six percent from US$18.64 to US$17.51 per share. How can such a drop be explained? Do tweets steer financial markets? Or is another dynamic at play?
The mobile app company Snapchat was founded in 2011 and today has almost 200 million daily active users. One can share images and videos that are up to ten seconds long with contacts, who are able to see the content only twice. In addition, Snapchat features a chat function and short stories that are visible for 24 hours. In March 2017, Snapchat became a stock-trading corporation listed on the New York Stock Exchange (NYSE) with an initial price of US$17 per stock. It never made any profits: Its loss was US$3.4 billion in 2017, US$0.5 billion in 2016, and US$0.4 billion in 2015. What’s Snapchat’s problem? Listing an unprofitable company on the stock market is high risk. Undertaking this step is based on the hope that financial markets will boost the confidence of investors and customers and increase profits in the future. Snapchat like most social media corporations uses targeted advertising as capital accumulation model. In 2017, 97% of Snapchat’s revenue was advertising-based. Ad clients can purchase snap ads, promoted stories, sponsored lenses and sponsored geofilters that are targeted to users’ location, age group, gender and interests. But targeted advertising is a high-risk business: Many users find ads annoying and it is not clear if targeted ads can significantly increase commodity sales. In addition, Snapchat is just like Twitter a platform that is based on high-speed content flows with short attention span. In an accelerated online culture, it is difficult to get users to focus on ads. Speed-up at some point of time tends to result in economic and cultural standstill.
As part of its IPO, Snapchat expanded its economic operations: It increased the number of its employees from 1,859 in December 2016 to 3,069 in December 2017. The annual costs for research, development and administration grew from US$350 million in 2016 to US$3.1 billion in 2017, whereas the increase in ad revenue was much more modest. Twitter faces a problem similar to Snapchat’s: Since becoming a stock-trading company in November 2013, it has never made any profits: Twitter’s annual losses amounted to US$108 million in 2017 and US$457 million in 2016. Kylie Jenner’s tweet was not the cause of Snapchat’s share price loss. The social media industry is highly financialised, operates on a high-risk business model in a highly oligopolistic market: Facebook and Twitter control more than two thirds of the global online ad market. Snapchat’s losses increased by 580 percent within a year. Losses make investors nervous. If there are indicators of potentially increasing future losses, a trigger event such as a celebrity’s tweet that she stopped using Snapchat can result in panic among investors based on fears of decreasing users and advertising profits. As a result, they start pulling out their invested capital. The 2000 dot-com bubble was based on the overvaluation of non-profitable Internet corporations’ stock market values. There was a divergence between real profits and financial market values so that a financial bubble built up that burst when investors collectively lost confidence. The economist David Harvey explains that the financial crash of 2008 had its causes in capitalism’s economic contradictions that expressed themselves in “successive asset bubbles” such as “the dot-com bubble and bust of the 1990s followed by the property market boom and bust of the 2000s”. Snapchat’s economic problem may be indicative of the build-up of a new financial bubble in the Internet economy. Is the social media industry overvalued?
Market capitalisation measures the financial market value of a corporation’s outstanding shares. The value of total assets is anything a business owns at a point of time and can convert into money. Whereas market capitalisation is a measure of a corporation’s fictitious value (achieved on stock markets), capital assets are a measure of its real value (the actual cash it can mobilise at a specific point of time). If we divide market capitalisation by total capital assets at a specific point of time, then we get a measure of how strongly financialised a corporation or industry is. The table below show the financialisation index of Snapchat, Twitter, Facebook and Google for 2017’s two last financial quarters. The larger this index is for a corporation, the higher its financial risk.
Snapchat’s financialisation increased during the past two financial years from a factor of 4.9 to 5.1. Also the other three corporations’ index increased. Facebook is with a factor of more than 6 particularly overvalued. Targeted advertising is a high-risk organisational model. It cannot be ruled out that a second dot-com crisis will develop. The only viable alternative to the high-risk business model of financialisation is that social media corporations become non-profit co-operatives that are owned by its users, do not aim to make profits, but rather serve human interests instead of financial interests.