So why exactly is a chat app worth 3 billion dollars?

Posted by: Gergely Sumegi (2 years, 11 months ago)

You must have heard the news last week: a 23-year-old guy said no to three billion dollars. That's £1.86 billion or €2.22 billion. The offer came from a 29-year-old guy, a Mark Zuckerberg. And the one refusing it was Evan Spiegel, founder and CEO of Snapchat.

According to Forbes, Zuckerberg is the 66th richest and the 24th most influential person in the world, with $19bn of net worth. His website is being used by more than a billion people in the world and generated $5bn income last year. The company is estimated to be worth $100bn.

On the other hand, Snapchat was used by 8 million people in May this year, got a $60m investment, and Evan Spiegel is not listed as either rich or powerful. One interesting question would be why someone would refuse a $3bn offer, but an even better question is why someone would pay $3bn for an app that destroys messages in a few seconds. An average Facebook developer could come up with the same app in a week. So why does Zuckerberg want Snapchat so desperately?

Let's have a look at the stats to find out!

At first sight Facebook grows steadily and unstoppably. But does it? Since Facebook was launched on the stock market, Zuckerberg's had to meet the demands and expectations of investors and shareholders. They appreciate growth but dislike stagnation and decrease: they sell their shares and exit the investment. Similarly, stock market penalizes the decrease of growth rate too.

So, does Facebook actually grow? Of course it does, but not nearly as convincingly as it did back in Q1 of 2011, when the daily growth was 800k new users. This figure is around 500-600k now, and only a very optimistic Zuckerberg can hope this trend may pivot.

The trend was actually obvious a few years ago, long before Facebook reached the 1bn user threshold. Look at the green line on the graph. And what kind of growth can be expected in the next 3 years or so? Well, something like this:

Now seriously, would you invest in a business that will reach a 0% growth rate in a couple of years? In the graph below, you can clearly see the correlation between the world's population, the number of internet users and Facebook users.

Especially the latter two are strikingly correlated. As a consequence, the growth of Facebook will stop for good if there are no more people. Do you remember, Zuckerberg's initiation of providing internet for people living in remote areas? Facebook simply needs more people in order to maintain its growth rate.

And what about the growth of the income, is it still allright?

Nope. Look at the red line this time. The income shows some kind of growth, but the rate is drastically decreasing. What's more, young users are abandoning Facebook and go somewhere else to chat, share pictures and have fun. Does anyone know a good service, which is used by the young and is growing? Oh, you mean Instagram? Facebook already bought it last year for $1bn.

Okay, here's another one that literally doubled its user base within a month:

What's its name again? Snapchat? According to Chritopher Poole, founder of bulletin board 4Chan, Zuckerberg's interest in Snapchat is good news. After being quoted in the New York Times, he added this in his blog: "I hope Snapchat’s dramatic rise represents a shift not only in consumer preferences, but also sends a message to service providers that it’s possible to build great, valuable products that embrace both pseudonymity and ephemerality."

Let's just stop and think again.

Facebook has grown too big and is too successful to care about "pseudonymity and ephemerality". Facebook just wants to carry on growing, and still wants names.

And Snapchat, despite the first impression, is not ephemeral at all. All user accounts come with an email address, a real, functional mobile phone number, a year of birth, and a contact list with all the phone numbers of real friends. Not acquaintances randomly friended on Facebook but those listed in the user's phonebook. This has an incredible value, especially when combined with Facebook's database.

And THIS is worth $3bn, not ephemerality. And this is the reason why Evan Spiegel doesn't want to give it away for all the money in the world.

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