The impact of Snapchat

Snapchat has become a wildly successful social media app, and according to Bloomberg, Snapchat users watch a remarkable seven billion video clips each day.

Snapchat, because of its unique feature of destructing videos and pictures shortly after use, is often disparaged as simply a ‘sexting’ tool.

But we believe Snapchat is an important new consumer trend that is redefining social media, and that has significant disruptive implications for incumbent players like Facebook and Instagram.

US mutual fund giant Fidelity Investments has become one of Snapchat’s largest owners, and we think it is important for investors to be across the Snapchat phenomenon.


I want this photo to disappear

Snapchat, originally called Pictaboo, was launched by Stanford University students Evan Spiegel and Bobby Murphy back in July 2011.

Snapchat was borne from a fellow university student’s simple comment: “I wish the photos I am sending this girl would disappear”.

The idea for the free mobile app was simple: allow people to send videos and pictures that self-destruct a few seconds after they are viewed.

The ‘ephemerality’ of Snapchat was a key differentiator from established players like Instagram.

Snapchat quickly gained traction with young users, many of whom had been burnt by images lingering on the internet, and the company attracted venture funding.

Zuckerberg circles

In 2013 Facebook founder Mark Zuckerberg offered $US3 billion to buy Snapchat. The owners turned it down and the company is now valued at around $US17 billion, based on Fidelity Investments’ valuation.

Zuckerberg had a track record of making successful acquisitions in this space. He knows what he’s doing. He bought Instagram in 2012 for $US1 billion and it is now reportedly worth some $US40 billion.

So what attracted Zuckerburg to Snapchat, and why do we think it is an important consumer trend that investors need to be watching?

For a start, we believe that Snapchat is the best approximation by a digital platform of how a real-life conversation takes place.

Snapchat, as a result of its magic disappearing qualities, retains a certain rawness to it. By contrast, Instagram misses the point, and it has evolved into a highly curated and stylised version of real life.

Ultimately, Snapchat is a digital conversation: it’s a platform that creates a digital conversation as close to an analogue conversation as possible; it’s raw, real life.


Reaching a key tipping point

Snapchat is evolving, though. It now has live ‘stories’ which stay on the platform for up to 24 hours. The recent Superbowl had its own ‘story’ which Snapchatters could post to. Snapchat has also become a vital tool in the US Presidential Primaries with Democrat challenger, Bernie Sanders, particularly making use of the platform to connect with younger voters.

Social media platforms have a clear trajectory: users get addicted, then as it matures B2C (business to consumer) opportunities emerge. Facebook for example is now a major advertising platform.

We believe Snapchat is on the verge of shifting from a niche platform to a mainstream media player.

By the second half of 2015, Snapchat reached 15 percent of US Internet users older than 18, according to ComScore.

Several years ago, Andrew Lipsman, vice president of marketing and insights at ComScore, analysed traffic to Facebook and MySpace in an attempt to discern when each saw the network effect kick in. He found the spot between 15 and 20 per cent penetration “seems to be where these social services just take off”.

While the Snapchat has grown 59 percent in the last year to 40.3 million US adult users (as of November), it has grown 69 percent among people age 25 to 34, according to ComScore.

Nearly 27 percent of US adult web surfers this age are on it. Look a bit more deeply and things get more interesting: nearly 13 percent of people between 35 and 44—the mainstream adults who didn’t grow up, like teens, using it—are on it.

No incumbent is immune

What does this growth and penetration mean?

Snapchat doesn’t generate revenue yet, but like Facebook we believe it will attract significant advertising revenue, particularly as brands come to the platform because their target markets are using it heavily.

The growth also highlights that no incumbent, like Facebook, is immune from disruption.

Facebook’s shares have performed strongly since listing and are now trading at US$113.71. It is too early to say that Facebook is a short given competition from the likes of Snapchat, but we need to watch their impact. There are after all only so many hour that one can remain glued to the screen of their phone. Once an incumbent loses audience this impact on their potential revenue stream.

Snapchat’s growth also means that if the company were to undertake its mooted IPO, it would worth a closer look from an investment perspective.

Understanding a rapidly changing world

Overall, we believe it is important to understand how rapidly digital communications is changing with the advent of the likes of Snapchat, and how it affects all players in that ecosystem. Some companies will embrace that change and disruption, and others will lag.

If we understand these rapidly changing consumer trends we will be better prepared when looking for new opportunities.

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