Snapchat gambles with a promising hand

In the bet of the decade, the young company has apparently traded a lot of cold, hard cash for promissory notes that it hopes to bank at a later date.

Jennifer Van Grove Former Senior Writer / News
Jennifer Van Grove covered the social beat for CNET. She loves Boo the dog, CrossFit, and eating vegan. Her jokes are often in poor taste, but her articles are not.
Jennifer Van Grove
3 min read
Snapchat co-founder Evan Spiegel, pictured left, at TechCrunch Disrupt. Screenshot/Jennifer Van Grove/CNET

Two-year-old Snapchat is playing a high-stakes game of Blackjack, betting that its business won't bust with the turn of an unwelcome card. The company reportedly refused a $3 billion cash buyout offer from Facebook, a decision that may forever define the future of Snapchat and Evan Spiegel, its 23-year-old CEO.

Venice, Calif.-based Snapchat traffics in disappearing messaging -- 350 million of them per day, to be exact. An unknown number of people, youngsters in particular, turn to the smartphone application to do what young people like to do: goof off. Here they send photos and videos, innocent or otherwise, that they believe will never come back to haunt them.

The startup makes no money, which means that it's worth whatever someone is willing to pay for it. And apparently investors are so anxious to get a piece of the company that they're willing to value it at $4 billion. But that's just play money -- it's not real like the $3 billion in cash Facebook CEO Mark Zuckerberg apparently was ready to trade for the teen-beloved app.

"If you look at it solely from a monetary perspective, yes, they're absolutely foolish," Altimeter Group principal analyst Brian Solis told CNET of Snapchat's rumored decision to reject the Facebook bid. "I don't know who's going to give them more than that -- or that they're going to generate more than that in terms of revenue."

Why, then, would Spiegel turn down $3 billion, which is three times the money Zuckerberg threw at up-and-coming Instagram last year? The simplest answer is because he can. Spiegel and Co. have been dealt an incomplete but promising hand.

Snapchat, said Gartner analyst Brian Blau, is in a position where there isn't much risk to wait for a bigger, better offer to come along. Indeed, The Wall Street Journal's scoop didn't close the door on an acquisition, indicating instead that Spiegel would wait until 2014 to make a decision about taking more financing or selling the company.

"What you're talking about here is the next half-generation of people coming under the Facebook umbrella," Blau told CNET of the social network's potential reasoning for bidding big on Snapchat. "But to be honest, I think [Snapchat] would have the same kind of value for other companies."

The logic goes that Spiegel can, in a market where the unprofitable Twitter is worth $25 billion, buy time if he wants to. His app's teenage audience is also the most-coveted in all of social media, as Blau insinuated.

Snapchat is a new and still unrivaled representation of the social network. A cross between monstrously popular mobile-messaging applications such as WhatsApp or WeChat and more traditional social networks, Snapchat is a hybrid app where people have complete control over what they share and who they share it with. And because Snapchat blends messaging, mobile, and social, the proxy comparisons to bigger or profitable apps are fairly open-ended.

"Instant-messaging services, such as Snapchat, are growing faster than anyone could have imagined," Forrester analyst Julie Ask said.

Ask lumps Snapchat in with other chat apps, a group of apps she said doesn't yet experience the same level of enthusiasm in the US as they do elsewhere in the world. But they very well could -- and soon. "The game is going to be: How big can your audience be? We've seen examples of companies going from zero to 400 or 500 million users inside of two years."

Clearly, Spiegel values Snapchat's unknown potential far more than Zuckerberg does, just like Zuckerberg anticipated back in 2006 that Facebook would be worth more than the $1 billion that Yahoo offered him. Interestingly enough, the Facebook of today looks a lot like the Yahoo of 2006, which was then a company that also tried to buy its way into the lives of the next generation of Internet users.

But Snapchat is far from a sure thing.

"If we've learned one thing, it's that no service is infallible and users are finicky," Solis said. "Snapchat is the next Snapchat until whatever is next comes up and starts to displace Snapchat -- just like Snapchat emerged out of nowhere and rivaled Instagram because it was just a new and different way to share pictures. At some point that's going to happen again."

If Snapchat isn't careful, it's now-you-see-it, now-you-don't philosophy may come back to haunt the company.