And 2013 was not the last time Facebook tried to buy out Snapchat. Facebook was interested in buying the upstart social media competitor as late as 2016.
But Snapchat, like another counterpart, Twitter, decided to chase an independent destiny. Whether Snapchat made the right decision or not is something that we can assess in hindsight based on its current financial standing and future potential.
And that’s what we will do in this blog. But first, we will look at how Snapchat makes money. And then, we will see whether Snapchat is profitable or not & how strongly it is positioned amidst the ever-increasing competition in the digital advertising industry. But before all of that, let’s set up some context by briefly looking at Snapchat’s founding and growth story.
Snapchat Founding & Growth Story
Like many popular tech success stories, three university students — Evan Spiegel, Reggie Brown, and Bobby Murph — founded Snapchat.
Around the time of Snapchat’s founding, in 2011, popular social media platforms like Facebook & Instagram were focused on sharing and saving photo memories, a concept Snapchat inverted on its face.
Explaining the rationale behind the idea in Snapchat’s first-ever blog post, Evan Spiegel, now CEO wrote in May 2012,
“And after hearing hilarious stories about emergency detagging of Facebook photos before job interviews and photoshopping blemishes out of candid shots before they hit the Internet (because your world would crumble if anyone found out you had a pimple on the 38th day of 9th grade), there had to be a better solution.
Snapchat isn’t about capturing the traditional Kodak moment. It’s about communicating with the full range of human emotion — not just what appears to be pretty or perfect. Like when I think I’m good at imitating the face of a star-nosed mole, or if I want to show my friend the girl I have a crush on (it would be awkward if that got around), and when I’m away at college and miss my Mom…er…my friends.”
By October 2012, a little more than a year post-launch, Snapchat users were sending more than 20 million unique Snaps in a day. By December, two months later, the number more than doubled to 50 million Snaps per day, after Snapchat launched a new feature allowing users to record and send 10-second videos. What made the video feature special? Well, instead of having to toggle between two different photo and video recording modes, as with camera phones, users could record a video by simply holding the photo capture button.
Snapchat followed up Video with two new features — Stories and Chat. Thanks to its now-ubiquitous fixture in almost every social media app, stories, as we all know, allow users to share ephemeral moments that disappear after 24 hours. On the other hand, the chat feature allowed users to converse with each other during live videos. In late 2014, Snapchat launched Geofilters, giving users the capability to customize snaps depending on their locations.
From Q1 2014 to Q4 2017, Snapchat grew from 46 million daily active users to 187 million active users, but growth slowed down later.
The slowdown in growth is attributed mainly to Facebook launching stories as a feature in Instagram in August 2016 and then following it up with the launch of stories in Facebook in March 2017. Within two years of the launch of Stories, Instagram had more than 400 million daily active story users, while Snapchat was languishing at 188 million daily active story users.
Since then, Snapchat’s growth slowed down. As of Q1 2021, 280 million users were using Snapchat daily.
Snapchat Business Model
As is the case with major social media companies, Snapchat also generates revenue mainly from digital advertising. In the years 2020, 2019 & 2018, advertising revenue accounted for approximately 99%, 98%, and 99% of total revenue, respectively. Snapchat generated the remaining income from the sale of Spectacles, which are smartglasses dedicated to recording video for Snapchat.
Snapchat’s advertising services are primarily divided into Augmented reality ads and Snap ads, advertising effectiveness measurement services.
In 2020, Snapchat made $2.5 billion in revenue but incurred losses of $944.8 million. A silver lining in Snapchat’s financials is that revenue has been increasing, and losses have decreased since 2017.
In terms of the geographical distribution of Snapchat’s 2020 revenue, $1.6 billion of revenue came from North America, $425 Million came from Europe & $431 million came from the rest of the world.
In Q4 2020, Snapchat recorded its highest ever Average revenue per user of $3.44.
When will Snapchat become profitable?
Snapchat is often criticized for not being able to achieve profitability in its almost decade-long run. Time and again, tech pundits have also speculated that it might get acquired by some tech giant. And this is because, given Snapchat’s current standing in the Facebook-ruled social media space, profitability seems like a long shot.
Snapchat will have to either increase its numbers of daily active users or average revenue per user to become profitable. In an ideal growth scenario, one would want to have both metrics in the green. An increase in daily active user growth could compensate for a relatively stable ARPU. Still, considering Snapchat’s recent usage growth numbers, it would be irrational to expect a sudden, massive increase in daily active users given its recent growth trend.
Snapchat vs. Competition
Before discussing how Snapchat fares against its competitors, we need first to define who its competitors are. One first thought, one would put rival social media companies like Facebook(including Instagram & WhatsApp), Tik Tok & Twitter in the bucket of Snapchat competitors.
But because Snapchat primarily makes money from advertising, it also competes for advertising spending that occurs on traditional offline channels like print, direct mail, television, radio, and ads spent on online platforms. And these online platforms are not just limited to Facebook, Tik Tok & Twitter, but also include platforms like Google(including YouTube), Amazon, Pinterest, and more.
The fact that offline advertising budgets are shifting to online advertising and online advertising is poised to grow is a positive sign for Snapchat, but ensuring these shifting media budgets get allocated to Snapchat will be a challenge because most digital ad spending goes to the Google-Facebook duopoly.
If you liked reading this piece, you might also like our article covering Tesla’s Business Model.