Snapchat: a platform for brands to tell their stories

Derrick Li
10 min readSep 8, 2016

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Banner ads try to sell you a product today and not care about you tomorrow. Brand building tells you a story today in order to sell you 1,000 products for the rest of your life.

What is Snapchat?

It’s for sexting, it’s for disappearing photos, it’s definitely only for kids, it’s…

The perception of Snapchat is that it is still only a sexting and “for kids who have nothing better to do” app.

Even Evan Spiegel had a tough time describing Snapchat.

Snapchat is the most misunderstood product today.

Snapchat is the platform for sharing the everyday moments. As David Byttow (founder of Secret) said, “Snapchat is the online persona of your daily life.”

Why do people use Snapchat?

People use social media to express feelings and emotions.

So why would people share their feelings and emotions on Snapchat vs. X?

  1. Snapchat’s content disappears after 24-hours, thus it is less serious than permanent mediums such as Twitter and FB.
  2. There is more content and thus, each photo or video has less scrutiny and judgement, which only leads to more sharing.
  3. Snapchat has no Like button, thus it feels less judgmental than FB which again allows for more, free sharing.
  4. Snapchat’s ease of creating content (you literally take a picture/video then send) is an understated advantage over alternatives.

Recently, Hilary Duff landed in hot waters over comments about wanting to share her “hot mom outfit” on Instagram.

Personally, I think she’s a hot mom, but that’s not the point here. The point here is that we now separate our lives into what is shareable and what is not.

We think that only the “special” moments are share-worthy on Instagram or Facebook. However, most humans have more “normal” moments than we do “special” thus, most moments are not shared… until Snapchat.

Where will Snapchat’s ad revenue come from?

I believe Snapchat’s monetization strategy rests solely on its ability to monetize big US brands.

This is due to the following four reasons.

  1. The United States is the largest media ads spend country.
  2. The future growth in US ad spend will be on mobile.
  3. Big brands (top 200 advertisers) account for 50%+ of the total ad expenditures in the US; yet, most of this money goes to TV.
  4. Snapchat as a medium is very similar to TV (this is where we piece together the above three reasons to show why they matter).

Media ad spend (specifically US)

In terms of media ad spend per capita, the US ranks #2 in the world (behind Denmark).

In terms of pure media ad spend, the United States ranks number one.

In fact, the US spends more on media ads than China, India, Japan, Germany, Brazil, and the UK combined — despite having only 1/7th of their total population.

The point here is simple: as an ad platform, if you have a lot of US consumers’ attention, you are bound to make a lot of advertising dollars.

This goes against the traditional school of thought which values MAU or DAU more than location. I would rather have one US DAU as opposed to 50 Cambodia DAUs (more on this later).

Mobile and ads

The story here is simple; we are spending more and more time on our mobile devices.

In the next five years, US mobile ad spend is estimated to grow by $30 bn, TV ad spend is projected to grow by $10 bn, and all other ad mediums are projected to stay constant or decrease.

Where the top 200 advertisers spend money

In 2014, the top 200 US advertisers accounted for 51% of the total ad spending.

Yet, in an age of massive internet adoption, most of these brands have stayed clear of both mobile and desktop advertising.

Take Coca Cola as an example.

In 2013, Coke spent 72% of its ad dollars on TV and only 3% online!

Why? Probably because most internet ads don’t tell stories which is necessary for brand building.

Internet ads try to sell you a product today and not care about tomorrow. Brand building tells you a story today in order to sell you 1,000 products for the rest of your life.

Snapchat — a medium for storytelling

Let’s piece it together: so far, we’ve figure out that the top 200 US advertisers account for the majority of US ad spend (which is the largest in the world). These big brands spend most of the money on TV despite the rise of the internet and mobile.

Big brands are potentially shying away from internet and mobile ads due to the inability or difficulty in telling the story of the brand.

Snapchat is the medium for brands to tell stories because Snapchat as a medium is similar to TV.

Compared to FB and Twitter, Snapchat’s content has more flow. Snapchat is telling a story within the app as opposed to promoting links to read about stories on other platforms.

Why is storytelling (branding) important?

How much would you pay for a Louis Vuitton bag? How much would you pay for the same bag if you learned that it’s a knockoff?

You’d probably pay a heck of a lot less for the knockoff, even if the two are identical.

Why?

Perhaps because storytelling and the image of what a brand stands for is ingrained in our DNA — we are searching for meaning in a meaningless world.

As society grows wealthier, the need for brand will only increase as our need for survival changes from the search for fuel to the search for meaning.

As Neural Correlates of Behavioral Preference for Culturally Familiar Drinks has shown, branding literally changes the brain chemistry. It changes our perception of our world without changing the substance.

Will Snapchat innovate more like Facebook or Twitter?

Continuous innovation that resonates with end users will be rewarded with growth.

FB has continued to innovate and disrupt itself in its 12 year history.

Twitter, on the other hand, has changed little in the last decade.

Assuming that major brands are willing to advertise on Snapchat, how big can Snapchat get?

Not every DAU is created equal

In Q4 2015, FB had 1.59 billion MAUs with DAU of 1.04 billion.

By comparison, Snapchat’s MAUs were ~200 million and DAUs a mere ~120 million.

However, don’t be fooled by numbers, Snapchat is a lot closer to Facebook’s size than we assume.

Let’s only concentrate on DAU as MAU is often irrelevant — MAU is the cereal you eat once a month while DAU is the cereal you eat every day, DAU products are a lot more pertinent to people’s lives.

Take a look at Facebook’s revenue per DAU over the past five years.

The US is growing exponentially, the EU linearly, and the rest of the world is crawling along.

In Q4 2015, FB’s revenue/DAU in the US is $17.46 vs. $2.74 in Asia. That means that 1 US DAU is equal to ~6 Asia DAUs…

Many have attributed the slow revenue growth in ex-US regions to FB’s focus on hyper acquiring users.

That is not entirely accurate.

As we have seen on the media ad spend by country breakdown (page 5), the US spends more on advertising than any other country.

If an advertising platform can dominate the US, it doesn’t even need to be present in any other country.

Snapchat’s worldwide DAU breakout

As shown above, Snapchat’s US DAU as a % of Facebook’s US DAU is already at 30%.

That’s impressive for three reasons:

  1. Snapchat is mobile only. FB has desktop + mobile.
  2. Snapchat has one product — Snapchat. Facebook has Facebook, Instagram, Messenger, WhatsApp, etc.
  3. Snapchat is five years old (September 2011). Facebook is 12 years old (February 2004).

Reserve value — $25 bn

Knowing Snapchat’s US DAU, what is Snapchat’s worth to Facebook today?

In 2015, Facebook’s US ad revenues were $8.35 bn. Based on 169 million DAUs, each US DAU attributed $49.40 in revenue to Facebook.

Based off of ~$3bn in assumed revenue for Snapchat and a 40% EBITDA margin, we get an EBITDA of ~$1 bn/year.

If we apply a 25x multiple to EBTIDA, Snapchat is a $25 bn company.

Of course, this is very crude. This does not take into account any premiums. It does not take into account that FB monetization of users is increasing.

It completely ignores 50%+ of Snapchat’s current DAUs (outside of US). It also assumes that Snapchat will monetize the same way as FB, which will probably NOT be the case. Still, it is a simple way to get a snapshot of Snapchat’s potential.

As a side note, I think the chances of FB acquiring Snapchat is HIGHLY UNLIKELY today.

This is not due to financial reasons but rather due to Zuck and Spiegel’s relationship. I don’t think the two see eye to eye. Check out Evan Spiegel’s Vanity Fair Interview. I think the reason the two don’t get along is because they both seek control.

People who seek full control and fail are known as assholes. People who see full control and succeed are known as visionaries.

If Snapchat 2x current US DAUs (and is able to execute ad plans) it is worth $80 bn:

I see Snapchat’s ad potential not through the lens of FB but TV.

Think about Snapchat this way: to advertisers, with the current 110+ MM DAUs, Snapchat is like the Super Bowl, EVERYDAY!

I actually think the opportunity for Snapchat is bigger than the Super Bowl as

  1. There are less commercials to compete with,
  2. You can track view through rates,
  3. Commercials for Snapchat are cheaper to make than the Super Bowl (less time and pressure) so advertisers can experiment more.

Let’s only focus on Snapchat’s revenue potential in the US.

This gives us a margin of safety.

Three key assumptions:

  1. Cost per view of ad ($0.02 — current)
  2. DAU in US
  3. Ads seen per day per DAU (assuming one ad every 12 10-second snaps or every 2 minutes)

In 2015, Snapchat started charging advertisers $750k/day for ads. It makes a lot of sense.

Assuming 20 MM people (16% of DAU) watch the ad, that’s still cheaper from a CPV perspective than the NCAA tournament, prime time TV, and the Super Bowl.

In 2016, Snapchat dropped CVP to $0.02 which media ad buyers agree is a fair price for Snapchat.

You can argue that Snapchat ads are

  1. Not 30-seconds
  2. You can skip it

I would argue that advertisers don’t care about how long the ads are, they just want it to work. Snapchat has to prove that its ad placements are effective. But if they are, advertisers won’t mind if ads are 5-seconds long as long as it gets the job done (people buy stuff).

The same can be said about TV and media online today, we can skip it. And yet, advertisers keep on pouring money into these mediums.

So if the CPV for Snapchat is $0.02, what is its potential market value?

Rumor is that Snapchat is going to hit revenues of $300 mm in 2016.

Many question whether that’s all Snapchat has the potential to do. I think it’s a test Snapchat is running — to see what ads work and where and when. Snapchat isn’t close to reaching its revenue potential.

We’ve just started the 1st inning.

Can Snapchat grow DAU 2x?

I think the short answer is yes.

As you can see from the above charts on product growth in relationship to years established, Snapchat is the second fastest growing “social” site in history (or at least what we know), surpassed only by Instagram.

I think Snapchat’s lack of revenue has been due to its focus on users acquisition and product.

Remember, Snapchat is only five years old.

Many questioned why FB didn’t have much revenue by year five… it was too busy growing.

History has shown that platforms that focus on growth and not initial revenue, will be rewarded with revenue later.

Snapchat’s valuation compared to FB’s

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