Does 1 Snapchat Equal 4 Instagrams?


Insane company valuations are a fact of life in the tech world. So perhaps we shouldn’t be surprised at Wednesday’s report that Snapchat — a tiny company with a single app and no income — turned down a $3 billion acquisition offer from Facebook, or that some new investors value the startup at $4 billion.

You can make a lot of eyebrow-raising comparisons based on sale prices for other companies. For instance, Lucasfilm and Marvel, two companies which created decades of unforgettable imagery, both sold to Disney for $4 billion; therefore, each is apparently as valuable to our society as an app maker whose whole purpose is to annihilate imagery.

That’s an apples and oranges comparison, of course. Movie studios tend to make conservative purchases, while tech giants and VCs have a history of outlandish bets. There’s just more money sloshing around Silicon Valley than — well, than pretty much anywhere in the world outside the Federal Reserve. It has to go somewhere. Flavor-of-the-month companies can command higher prices.

No, the only way to decide whether Snapchat is overvalued is to compare this situation to other recent ridiculous-sounding Silicon Valley purchases. The best point of comparison would be the only other no-revenue startup that Facebook made a billion-dollar play for last year, more successfully: Instagram.

Instagram’s initial sale price was $1 billion; this later slumped to $715 million because of declining stock. At the time, just 18 months ago, it seemed a ridiculously good price. Given Instagram’s growth since (another 120 million active users!), and the arrival of the highly-engaging first Instagram ad, it seems a smarter purchase.

But to believe that Snapchat is worth its alleged valuation, to justify that financial hubris, you have to say that Snapchat has the potential to become not just as valuable as Instagram, but four times as valuable as Instagram. Let’s compare the two companies.

Instagram has 150 million users at last official count. Snapchat has not officially revealed its user numbers. A Pew Research study in October found that 9% of all U.S. cellphone owners use Snapchat, putting its numbers somewhere around the 30 million mark.

Analytics company Onavo estimates that 38% of all iPhone owners use Instagram, while 21% use Snapchat. Both numbers are growing, Onavo says — Instagram by 2.5% a month, Snapchat by 4% a month. That suggests it’s going to take a while for Snapchat to overtake Instagram in iPhone market share.

But here’s the best statistic, as far as Snapchat is concerned. Instagram users post an average 55 million pictures a day. Snapchat says its users are sharing 350 million pictures a day. Not only is that almost exactly the same as Facebook, it’s a multiple of more than six over Instagram. If active user engagement is the metric that matters, then perhaps Snapchat is actually undervalued.

The Long Run

To truly know the value of a company, you have to get a sense of its longevity. Will we still be using Instagram a decade from now? There is an addictive aspect built in to the service: your pictures get rewarded with Likes. You build up a portfolio of images and get to scratch your artistic itch with filters.

Scroll back through the Instagram snaps you and your friends took in 2013, and it’s hard not to feel like you had a rich and fulfilling year. You can almost hear Green Day’s “Time of Your Life” playing in the background.

Snapchat snaps leave no trace (though you can pay to recover them). They are fundamentally ephemeral. You can’t look back on you and your friends’ best Snapchats of 2013, unless you committed the app’s ultimate faux pas of taking screenshots. Sensing that we like to look back on our memories, the company recently created Snapchat Stories — but even these stitched-together collections only last for 24 hours.

We should be wary of describing anything that gets used 350 million times a day as a fad. But really, Snapchat’s product is the definition of a fad: It holds your attention for 10 seconds, then it’s gone. There is a time in our lives when we enjoy ephemeral pleasures; the older we get, the greater the urge to preserve the past, not kill it. Goofy pictures from our youth are preferable to no pictures from our youth.

Snapchat could build a business out of its niche audience of teens and sexters, of course. There will always be a surfeit of both. (That’s presuming you can get teens to hold on to anything for more than a generation; they’re already getting bored with Facebook.)

But if you want to build a business that’s four times the value of Instagram, you need to bring more users into the picture, and keep them there.

Image: Flickr, Ryan Nagelmann


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